Grounds of Appeal in a Case of Breach of Fiduciary Duty and Secret Profits, Lecture notes of Business

Download Grounds of Appeal in a Case of Breach of Fiduciary Duty and Secret Profits and more Lecture notes Business in PDF only on Docsity! Inghilterra e Galles, Court of Appeal, Clarke, Jonathan Parker, Arden, L.JJ., 16th March 2005 [Murad & Anr. v Al-Saraj & Anr.] Lady Justice Arden: 1. This is an appeal from parts of the orders dated 28 May and 14 July 2004 of Etherton J. These orders gave effect to the various judgments of the judge following the trial of this action. Background 2. The claimants in this action, who are the respondents to this appeal, are two sisters, Aysha and Layla Mohammed Murad. I shall call them the Murads. In the action, they sought from the defendants, who are now the appellants, wide-ranging relief including rescission, declarations, damages and an account of profits and other benefits. The respondents are Westwood Business Inc and Mr Hashim Ibrahim Khahil Al-Saraj, whom I will call respectively Westwood and Mr Al-Saraj. Westwood is a company owned by Mr Al-Saraj. 3. In about September 1997, Mr Al-Saraj proposed to the Murads that they should together buy a hotel, called the Parkside Hotel in Clapham, London, for £4.1 million, of which £1 million was to be paid by the Murads, and £500,000 by Mr Al-Saraj. The balance was to be raised by way of bank loan. It was orally agreed between the parties that Mr Al-Saraj and the Murads would share the revenue profits from the hotel as to one third each. If the hotel was sold, the capital profit would be shared 50:50 between Mr Al-Saraj on the one hand and the Murads on the other hand. The purchase of the hotel was effected by Danescroft Properties Limited (“Danescroft”), a Gibraltarian company owned by Mr Al-Saraj and the Murads on 26 November 1997, and the consideration stated in the transfer was £3.6 million. In December 1997, the Murads entered into a written agreement with Westwood, called the Westwood agreement by the judge, and this agreement regulated the disposal of the proceeds of sale. 4. In the action the Murads contended that prior to the purchase of the hotel Mr Al-Saraj represented to them that the purchase price for the hotel would be £4.1 million and that he would make his contribution of £500,000 to the purchase price in cash. In the event, this contribution had been made by offsetting unenforceable obligations of the same nominal aggregate amount due from the vendor, a Mr Al Arbash, to Mr Al-Saraj against part of the price. The obligations included a sum of £369,000, which represented Mr Al-Saraj’s commission for introducing the purchasers to Mr Al Arbash. Mr Al-Saraj argued that it was not necessary for him to contribute the £500,000 in cash. However, the judge found against Mr Al-Saraj. He held that Mr Al- Saraj had fraudulently represented that the total price for the hotel would be £4.1 million and that his contribution of £500,000 would be in cash. He also accepted the Murads’ case that the actual price of the hotel was £3.6 million not £4.1 million. However, the judge found in favour of Mr Al-Saraj that, although the £500,000 set off could not be described as part of the purchase price for the hotel, the seller would not have sold the hotel for anything less than £4.1 million in total. The judge further held that there was a fiduciary relationship between the Murads and Mr Al-Saraj in relation to the joint venture to acquire the hotel. He held that: “The relationship between [the Murads and Mr Al-Saraj] was a classic one in which [the Murads] reposed trust and confidence in Mr Al-Saraj by virtue of their relative and respective positions.” (judgment, para 332). There is no appeal from that holding. The judge further held that Mr Al-Saraj was in deliberate breach of his fiduciary duty in not disclosing to the Murads that he was making his contribution by way of set off. 5. He found that, separately from the £500,000 referred to above, Mr Al-Saraj contributed £225,817.99 in cash towards the total purchase price and expenses of purchase. It is said by the respondents that Mr Al-Saraj lent this sum to Danescroft, and is therefore a creditor of Danescroft for this amount. 6. The judge handed down his judgment on 28 May 2004. He made a number of orders, including an order that there should be judgment for the respondents for an account of the appellants’ profit from the sale of the hotel. He adjourned the question of whether any part of the £500,000 set off should be treated as part of the costs and expenditure of the appellants for the purpose of calculating the appellants’ profit from the transaction. 7. The matter came back before the judge on 12 July 2004 and again on 25 February 2005 when the judge made a number of further orders. In particular, he ordered that the appellants should account to the respondents for the entire profit which they made from the acquisition of the hotel excluding any sums or benefits to which Mr Al- Saraj was entitled as an employee of the company which managed the hotel. The judge further ordered that “the amount of £500,000 negotiated and agreed between Mr Al-Saraj and [the seller of the hotel] should be treated for the purposes of the account as an expense of the transaction incurred by [Mr Al-Saraj] whereby [Danescroft] was enabled to acquire the Parkside Hotel.” The judge rejected the respondents’ contention that the sum of £369,000 should not be allowed because it was a secret commission. He held that there should have been a separate pleaded claim for an account of that sum. 8. The appellants appeal against the judge’s order for an account. There are a number of grounds of appeal, but the primary ground is that the account of profits should have been limited to the profits obtained by the breach of fiduciary duty. They submit that the judge should have taken account of the fact that he found that, if the set off had been disclosed to the Murads, they would have agreed to go ahead with the acquisition of the hotel but demanded a higher profit share. Accordingly, the appellants’ case is that they should only be liable for the loss incurred by the Murads as a result of the non-disclosure of the set off arrangement. 9. The appellants raise further grounds of appeal. In particular, they submit that it was not open to the respondents on the pleadings to contend that it had been agreed between the Murads and Mr Al-Saraj that the sum of £500,000 should be contributed by him in cash. 10. The respondents for their part cross appeal on the issue of whether the judge was correct in holding that the sum of £500,000 should be allowed to Mr Al-Saraj on the account as an expense of the acquisition of the hotel. 11. The form of the judge’s order of 14 July 2004 was not settled until 25 February 2005. Mr Stephen Cogley, for the appellants, has sought leave to amend his grounds of appeal so as to challenge the inclusion in the judge’s order of revenue, as well as capital, profits. It is clear from the judge’s judgment of 25 February 2005 that the judge intended that such revenue profits should be included on the grounds that they were a profit made in breach of duty. The judgment below 12. The judge gave a lengthy judgment on 28 May 2004. As the appeal is against part only of his findings, it is not necessary for me to summarise it all. Crucially, the judge made the following findings about the effect of the alleged misrepresentation:- “286. Having heard Mrs Murad and her husband in the witness box, and considering the evidence as a whole, I reject any suggestion that she would simply have accepted, without question or proof, that the set-off arrangement of £500,000 was equivalent to a cash contribution of the same amount. She would have enquired as to the genuine existence of the indebtedness and its composition. Such enquiry, if truthfully answered, would have disclosed that the commissions represented by the £500,000 were not the result of any legal obligation under a continuing contractual retainer, but were the result of negotiation and agreement in the context of the sale of the Hotel to Claimants and the Defendants. Mrs Murad would have discovered, on Mr Al-Arbash’s evidence, that as much as £369,000 commission was attributable to the sale of the Hotel to the Claimants and the Defendants. In other words, Mr Al-Saraj was treating as a substantial part of his contribution to the purchase price a notional commission on the sale to himself. The overwhelming probability is that Mrs Murad would have rejected any such commission as giving rise to any entitlement to a share in the revenue or capital profits of the Hotel. 287. I consider that the probability is that, in the light of the complicated nature of Mr Al-Saraj’s proposed contribution to the purchase price, and the scepticism with which Mrs Murad would have greeted it, Mrs Murad’s strong inclination would have been to reject the investment proposal as a whole. I accept her evidence, however, that Mr Al-Saraj was extremely keen to persuade her to invest. He would have used all his skill and experience to persuade her to do so. In the light of an actual cash contribution of over £225,000, I consider, on balance, that he would have succeeded in persuading her to invest, but, in order to achieve that agreement, he would have been prepared to accept that, and Mrs Murad would only have agreed to proceed on the basis that, he (or Westwood) would be entitled to receive less than 50% of the capital profit on any resale. 288. Neither side has advanced any submissions to me as to what percentage would have been agreed between the parties if Mr Al-Saraj had disclosed all the facts to Mrs Murad. For the reasons which appear subsequently in this judgment, it is not necessary for me to reach any conclusion as to what precise share would have been agreed in favour of Mr Al-Saraj or Westwood.” 13. There is no appeal from the judge’s finding that Mr Al-Saraj was a fiduciary vis-à-vis the Murads. The appellants do not challenge the right of the respondents to proceed on the basis of an account, rather than their claim to damages for fraudulent misrepresentation. The judge held that the remedy of account was “a particularly appropriate remedy in the case of deliberate and dishonest conduct designed to achieve a commercial advantage for the fiduciary over [sic] those to whom he owes his fiduciary duty.” (judgment, paragraph 340). The judge continued: “In this connection, I record, for the sake of completeness, that Mr Cogley accepts that, if I had found there was a deliberate and dishonest breach of duty by Mr Al-Saraj, there could be no claim by him for any reward or allowance for introducing to the claimants the investment in acquiring the hotel.” (judgment paragraph 341). However, the respondents accepted before the judge and in this court that Mr Al-Saraj’s right to be remunerated for managing the hotel on the basis agreed by the parties should not be disturbed, and in addition that Mr Al-Saraj would be able to recover his loan of £225,817.99. 14. With respect to the claim for an account of profits, the judge held as follows:- “347. In my judgment, the Claimants are entitled, by reason of Mr Al-Saraj’s actionable deceit, to an account of the profit to which Westwood is entitled under the Westwood Agreement. In this connection, I should observe that no submission was made to me by either side that, if I came to the conclusion that the Claimants are entitled to an account of profit by reason of Mr Al-Saraj’s deceit, burden is put on the defendants. A further reason is the need for deterrence. It is a very well established rule of policy in these cases that the court should not inquire into whether the principal had in fact suffered a loss. In this regard, Mr Newey relies on ex parte James (1803) 8 Ves.337 and Parker v McKenna (1874) LR 10 Ch App 96. He further relies on Bray v Ford [1896] AC 44, the Regal case per Lord Wright, United Pan-Europe Ltd v Deutsche Bank AG per Morritt LJ at paragraph 47, and the Gwembe case at page 164. Mr Newey submits that while an account may be ordered of an unauthorised profit, this is because there would be no difficulty on investigation. In this case, no part of the profit was the subject of informed consent. No untainted share of profits can be identified. 34. Mr Newey submits that the Murads would not have accepted that Mr Al-Saraj was entitled to any share of profits at all, whether revenue or capital. Mr Newey submits that not only was the sum of £500,000 not paid in cash as promised, but also the judge found that the price was £3.6 million not £4.1 million. That was the price in the transfer for the hotel. The set off in respect of amounts totalling £500,000 due to Mr Al-Saraj from the owner of the hotel was in respect of matters which the judge found did not constitute legally binding obligations of the owner of the hotel. The Murads would not have accepted that liabilities of this kind should count as costs of the acquisition. Moreover, the advance of £225,817.99 was never intended to give rise to a profit share. It was simply an advance of cash. The parties referred to this sum in the Westwood agreement. It was only the sum of £500,000 which was to give rise to a profit share. The question whether in the light of the judge’s findings about fraudulent misrepresentation any part of that sum should be treated as giving rise to a profit share should have been ventilated at trial. 35. Mr Newey distinguishes the Fyffes case on the grounds that this was not a case about a fiduciary but about a defendant who was found liable for dishonest assistance in a breach of trust. Mr Newey submits that different principles apply here. If the principles are the same, the Fyffes case is inconsistent with the Gwembe case and cannot stand. 36. Mr Newey also seeks to distinguish the Warman case. In that case there was a mixed fund, which is not the situation in this case. Mr Newey points out that this is a decision of the High Court of Australia and submits that the High Court has taken a wider view of the jurisdiction to allow allowances on an account than the English courts. Mr Newey relies on the passage at page 558 which makes in clear that the imposition of the liability to account is grounded in policy to ensure that other fiduciaries are deterred. Mr Newey also relies on the passage at page 561 to 562 that the defendant has the burden of proof at trial. 37. Mr Newey submits that it is contrary to public policy that the fiduciary should recover any profit in these circumstances. The allowance in the account of the sum of £500,000 38. Mr Newey accepts that as a matter of law, the court can make an allowance against a profit found on the taking of an account but in this case it was conceded that no such allowance was available. In this regard, Mr Newey relies on two passages in the judge’s judgments (at paragraphs 61 and 341) in which the judge stated that it was conceded that there could be no allowance on the taking of the account for Mr Al-Saraj’s work in securing the investment. That is a different matter from whether or not there could be any allowance for a profit share in respect of monies which he put into the joint venture. 39. In support of his cross appeal, Mr Newey submits that an equitable allowance is only allowed where the court can be satisfied that, if it is allowed, it will not encourage fiduciaries to act in breach of duty. Accordingly, an allowance is limited to a sum in respect of the fiduciary’s services to enable the profit to be earned. In support of this submission, Mr Newey relies on Guinness v Saunders [1990] 2 AC 663 at page 791E per Lord Goff. 40. Mr Newey submits that the judge found that £369,000 out of this sum of £500,000 represented indebtedness in respect of a secret commission agreed to be paid by the owner of the hotel to Mr Al-Saraj in respect of the sale to Danescroft. Accordingly this should not in any event be allowed as a deduction from the account. As regards the sum of £225,817.99, Mr Newey submits that this was a loan to Danescroft which will be repaid and accordingly no reduction from profit should be made in respect of that sum. 41. Mr Al-Saraj will be remunerated for his services under the terms of the judge’s order of the 12 July 2004. The effect of the judge’s order is not to put Mr Al-Saraj in any worse position from that in which he was before. The effect of the order is simply to strip him of any profit. The Murads regard themselves as having been tricked by Mr Al-Saraj, and the judge so found. The proper claimant in respect of the secret commission 42. Mr Newey submits that the exclusionary rule in Johnson v Gore Wood does not apply in the present case. The company had no claim to recover the commission. In this regard he relies on Shaker v Al-Bedrawi [2003] Ch 350. That case also establishes that if a party wishes to rely on the exclusionary rule, it has to show that the company would also have a claim. Mr Newey submits that in the present case there was no breach of duty to the company. 43. Mr Newey submits that a similar submission was made to the judge that Mr Al-Saraj was a fiduciary for Danecroft, not the Murads. But the point was not raised that Danescroft was also the proper claimant in relation to the commission. The point now raised on Johnson v Gore Wood on the commission was thus not raised below. He submits that the respondents are prejudiced. The point should have been raised at trial or at one of the hearings thereafter. In any event, the point on his submission is arid because, if the company had a claim, there would be no answer to it. 44. On the judge’s finding, this was treated as a cost of the acquisition in its entirety and it was accordingly allowed as a deduction from the profits for which Mr Al-Saraj was to account. But it is said that this overlooks the fact that some £369,000 was a commission earned by Mr Al-Saraj on the acquisition of the Parkside Hotel for which he should account as a secret profit. On the judge’s findings, no objection can in my judgment be taken to the allowance of the balance of the £500,000, namely the £131,000. 45. The claim for an account of the £369,000 is in my judgment unanswerable on general principles unless of course the claim to recover that sum belongs to Danescroft. I now turn to that issue. Conclusions Extent of the liability to account and the revenue profits point 46. It would be tempting to jump to the conclusion from paragraph 347 of the judge’s judgment (set out in paragraph 14 above) that in this case the judge took the novel step of awarding the equitable remedy of account for the common law tort of deceit (cf Attorney General v Blake [2001] 1AC 268), but that is not in my judgment the true interpretation of the judge’s judgment. The judge gave a remedy of account because there was a fiduciary relationship. For wrongs in the context of such a relationship, an order for an account of profits is a conventional remedy. The Murads considered that that remedy would be more beneficial to them because, if they were awarded damages at common law, they would simply be entitled to recover the difference between the profit share to which they agreed and that which they would have negotiated if the true position had been disclosed to them. The reference to deceit is, however, a reminder that the judge’s finding was that Mr Al-Saraj’s failure to disclose the set off arrangement to the Murads was both deliberate and fraudulent, a point to which I shall have to return. 47. A distinguishing feature of this case is that, because the claim was brought both in tort and for breach of fiduciary duty, the judge carefully made all the findings which might be relevant if his conclusion on fiduciary duty was reversed on appeal. He accordingly made a finding as to what the Murads would have done if they had been given the information withheld from them. As I have explained, he held that the Murads would still have entered into a joint venture with Mr Al-Saraj but they would have agreed with him that he should have a reduced profit share. The appellants seize on that finding as relevant also to the question of liability to account as a fiduciary. The finding is highly compressed, and it is not clear, on the facts as found by the judge, exactly why the Murads would have agreed to give Mr Al-Saraj a profit share in the changed circumstances. I consider it most likely that what the judge had in mind was that the Murads would have agreed to give Mr Al-Saraj a profit share in return for a cash injection (other than by way of loan). In other words, what the judge found was that the Murads would have given him a profit share in return for an investment not as a reward for the service of introducing the Murads to the Park Hotel venture. If the position had been the latter, the more obvious course for Mr Al-Saraj would have been to attempt to convince the judge on the taking of the account that he ought to be allowed a profit share as an introductory fee. 48. Even on my reading of the judge’s findings, it is not clear if the Murads would have been willing to give Mr Al-Saraj a (reduced) profit share if they were not also told about the secret commission Mr Al-Saraj was to receive from Mr Al Arbash. But that is by the by. 49. There has been some debate as to whether Mr Al-Saraj was liable for breach of fiduciary duty because he was under a duty to disclose information which he failed to disclose, or whether he made a secret profit for which, in the absence of disclosure and the consent of the Murads, he is liable to account on the basis that such liability is an incident of the fiduciary relationship rather than a breach of duty. The judge’s judgment suggests the former. The respondents rely on the latter because that leads them directly to the Regal case. For my own part, for the purposes simply of the question on this appeal, I do not think it matters which way the appellants’ liability is analysed. 50. Before going further I must deal with the submission that it is now too late for the appellants to raise the issue of the scope of the liability to account. I have set out above paragraph 347 of the judge’s judgment where he noted that no submission had been made to him that the account should be of anything less than the whole of the profit from the acquisition of the Parkside Hotel. The scope of the liability to account was the subject of further submissions to the judge after judgment, and accordingly I would not hold that the appellants are precluded from challenging the order for account made by the judge on 28 May 2004 on the grounds, as suggested, that the judge made an error of law. 51. There is in fact another pleading point, which has not in fact been pressed by Mr Cogley but with which I should deal. It concerns the question whether the respondents could contend for the disallowance from the account of the £369,000 commission forming part of the £500,000 set off agreed between Mr Al Arbash and Mr Al-Saraj. 52. In disagreement with the judge, I do not consider that there had to be any pleaded claim to recover the sum of £369,000 since the Murads’ case is that the sum of £500,000 should (to that extent) be disallowed as an expense on the taking of the account. Moreover, the judge also rejected the claim to disallow the sum of £369,000 on the footing that Mr Al Arbash would not have sold the hotel to the parties unless that sum had been paid, but the logically prior point is whether Mr Al Arbash insisted on paying a commission in the first place. It does not follow from the set off arrangement that he required there to be a commission. Indeed, that would be contrary to common sense. 53. It would be convenient to record that neither counsel had suggested that the sum of £500,000 should be valued for the purposes of the account rather than taken at its nominal amount. 54. The argument which Mr Cogley makes is a powerful one. His case is that, where a fiduciary is made to account, there has to be a link between the profit and his wrongful act. This argument receives powerful support from the judgment of Millett LJ in Bristol & West v Mothew, with whom Otton LJ agreed: “Although the remedy which equity makes available for breach of the equitable duty of skill and care is equitable compensation rather than damages, this is merely the product of history and in this context is in my opinion a distinction without a difference. Equitable compensation for breach of the duty of skill and care resembles common law damages in that it is awarded by way of compensation to the plaintiff for his loss. There is no reason in principle why the common law rules of causation, remoteness of damage and measure of damages should not be applied by analogy in such a case. It should not be confused with equitable compensation for breach of fiduciary duty, which may be awarded in lieu of rescission or specific restitution. This leaves those duties which are special to fiduciaries and which attract those remedies which are peculiar to the equitable jurisdiction and are primarily restitutionary or restorative rather than compensatory […]” 55. On Mr Cogley’s submission, the account ordered by the judge would not be restitutionary or restorative. It would result in unjust enrichment of the Murads. It is (he submits) wrong in principle that the Murads should receive the benefit of any profits which, if there had been full disclosure, they would have been content for Mr Al-Saraj to have. They all along anticipated being co-venturers with him and so expected him to have a share of the profits from the acquisition of Parkside Hotel. Increases in profits not attributable to his wrongful conduct should be excluded from the profits for which he has to account. There is the further circumstance that the judge found that Mr Al Arbash would not have sold the hotel to Danescroft but for the set-off arrangement negotiated between him and Mr Al-Saraj. 56. To test Mr Cogley’s argument on the extent of the liability to account, in my judgment it is necessary to go back to first principle. It has long been the law that equitable remedies for the wrongful conduct of a fiduciary differ from those available at common law: hence the observations in the first paragraph of these conclusions. Equity recognises that there are legal wrongs for which damages are not the appropriate remedy. In some situations therefore, as in this case, a court of equity instead awards an account of profits. As with an award of interest (as to which see Wallersteiner v Moir (No 2) [1975] QB 373), the purpose of the account is to strip a defaulting fiduciary of his profit. 57. That last point, and other valuable points, are made by Morritt LJ, with whom Ward LJ and Charles J agreed, in the Pan-Europe case: “47. For my part I think that there is substance in both submissions. If there is a fiduciary duty of loyalty and if the conduct complained of falls within the scope of that fiduciary duty as indicated by Lord Wilberforce in New Zealand Netherlands Society ‘Oranje’ Inc v Kuys [1973] 2 All ER 1222, [1973] 1 WLR 1126 then I see no justification for any further requirement that the profit shall have been obtained by the fiduciary ‘by virtue of his position’. Such a condition suggests an element of causation which neither principle nor the authorities require. Likewise it is not in doubt that the object of the equitable remedies of an account or the imposition of a constructive trust is to ensure that the defaulting fiduciary does not retain the profit; it is not to compensate the beneficiary for any loss. Accordingly comparison with the remedy in damages is unhelpful.” 58. Furthermore, a loss to the person to whom a fiduciary duty is owed is not the other side of the coin from the profit which the person having the fiduciary duty has made: that person may have to account for a profit even if the beneficiary has suffered no loss. 59. I would highlight two well-established points about the reach of the equitable remedies: (1) the liability of a fiduciary to account does not depend on whether the person to whom the fiduciary duty was owed could himself have made the profit. (2) when awarding equitable compensation, the court does not apply the common law principles of causation. 60. Proposition (1) is established by numerous authorities. It is sufficient for me to cite the well-known passage from the speech of Lord Russell of Killowen in the Regal case at pages 144G – 145A: “The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been authorities just cited show that in the field of fiduciaries there are policy reasons which have for a long time been accepted by the courts. 76. For policy reasons, the courts decline to investigate hypothetical situations as to what would have happened if the fiduciary had performed his duty. In Regal case at page 154G, Lord Wright made the following point, to which I shall have to return below: “Nor can the court adequately investigate the matter in most cases. The facts are generally difficult to ascertain or are solely in the knowledge of the person being charged. They are matters of surmise; they are hypothetical because the inquiry is as to what would have been the position if that party had not acted as he did, or what he might have done if there had not been the temptation to seek his own advantage, if, in short, interest had not conflicted with duty.” 77. Again, for the policy reasons, on the taking of an account, the court lays the burden on the defaulting fiduciary to show that the profit is not one for which he should account: see, for example, Manley v Sartori [1927] Ch 157. This shifting of the onus of proof is consistent with the deterrent nature of the fiduciary’s liability. The liability of the fiduciary becomes the default rule. 78. This principle was applied by the High Court of Australia in the Warman case: “It is for the defendant to establish that it is inequitable to order an account of the entire profits. If the defendant does not establish that that would be so, then the defendant must bear the consequences of mingling the profits attributable to those earned by the defendant’s efforts and investment, in the same way that a trustee of a mixed fund bears the onus of distinguishing what is his own.” 79. In the Warman case, the defaulting fiduciary was able to show that some of the profit was not attributable to his wrongful act, but to his own skill and effort. The Court limited the account accordingly. On the facts, the court was satisfied that the period of time for which profits were to be accounted should be limited to two years. I will come back to this point below. 80. The above examination of the rule of equity applied in the Regal case is not promising for Mr Cogley’s argument. On the contrary, on its most obvious analysis, his argument is clearly inconsistent with it, since the essence of his approach is to seek to limit Mr Al-Saraj’s liability to account for profit to the loss suffered by the Murads. As the Regal case shows, liability to account for profit in equity does not depend on whether the beneficiary actually suffered any loss. I thus turn to consider whether there is any other way in which Mr Cogley’s argument can be analysed in conformity with the principles of equity. 81. While the rule of equity applied in the Regal case is a rigid and inflexible rule, historically equity has been able skilfully to adapt remedies against defaulting trustees or fiduciaries so as to meet the justice of the case. One small example of this is the VGM principle. Under this principle, a director ordered to pay compensation for misfeasance to his company in liquidation will not be required to pay amounts which would simply be distributed in the liquidation back to him as, say, a creditor (see for example Selangor United Rubber Estates v Cradock (No 4) [1969] 1WLR 1773). Likewise a court of equity will fix the measure of damages against a defaulting but innocent trustee more leniently than it would otherwise have done: see for example Shaw v Holland [1900] 2 Ch 305, 310. Again, courts of equity award simple or compound interest and interest at different rates according to the circumstances of the case (see for example Wallersteiner v Moir (No.2) [1975] QB 373). In these ways, equity tempers the harsh wind to the shorn lamb. 82. I have already set out Lord Wright’s observations in the Regal case about the difficulties of investigating the conduct of a defaulting trustee. Under the rule of equity applied in that case (and in part summarised in proposition (1) above), cases can be found where the fiduciary or trustee acted in all good faith believing that he was acting in the interests of his beneficiary but yet has been made to account for the profits obtained as a result of the breach of trust without limitation. Now, in a case like the Regal case, if the rule of equity under which the defendants were held liable to account for secret profits were not inflexible, the crucial issue of fact would be: what the company would have done if the opportunity to subscribe for shares in its subsidiary had been offered to it? In the passage just cited, as I have said, Lord Wright makes the point that it is very difficult to investigate that issue. However, while that may have been so in the past in the days of Lord Eldon and Lord King, that would not be the case today. The court has very extensive powers under the Civil Procedure Rules for instance to require information to be given as to a party’s case. If the witness cannot attend the hearing, it may be possible for his evidence to be given by way of a witness statement or it may be possible for him to give evidence by video-link. The reasons for the rule of equity are many and complex (for a recent discussion, see Conaglen, The Nature and Function of Fiduciary Loyalty ([2005] LQR 452). There have been calls for its re-examination (see, for example, the articles cited at [2005] LQR 452,478 at footnote 151). It may be that the time has come when the court should revisit the operation of the inflexible rule of equity in harsh circumstances, as where the trustee has acted in perfect good faith and without any deception or concealment, and in the belief that he was acting in the best interests of the beneficiary. I need only say this: it would not be in the least impossible for a court in a future case, to determine as a question of fact whether the beneficiary would not have wanted to exploit the profit himself, or would have wanted the trustee to have acted other than in the way that the trustee in fact did act. Moreover, it would not be impossible for a modern court to conclude as a matter of policy that, without losing the deterrent effect of the rule, the harshness of it should be tempered in some circumstances. In addition, in such cases, the courts can provide a significant measure of protection for the beneficiaries by imposing on the defaulting trustee the affirmative burden of showing that those circumstances prevailed. Certainly the Canadian courts have modified the effect of equity’s inflexible rule (see Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1; see also the decision of the Privy Council on appeal from Australia in Queensland Mines v Hudson (1978)52 AJLR 399), though I express no view as to the circumstances in which there should be any relaxation of the rule in this jurisdiction. That sort of question must be left to another court. 83. In short, it may be appropriate for a higher court one day to revisit the rule on secret profits and to make it less inflexible in appropriate circumstances, where the unqualified operation of the rule operates particularly harshly and where the result is not compatible with the desire of modern courts to ensure that remedies are proportionate to the justice of the case where this does not conflict with some other overriding policy objective of the rule in question. 84. However that is not this case. Mr Al-Saraj was found to have made a fraudulent misrepresentation to the Murads who had placed their trust in him. I do not consider that, even if we were free to revisit the Regal case, this would be an appropriate case in which to do so. The appropriate remedy is that he should disgorge all the profits, whether of a revenue or capital nature, that he made from inducing the Murads by his fraudulent representations from entering into the Parkside Hotel venture, subject to any allowances permitted by the court on the taking of the account. 85. The imposition of liability to account for secret profits and the placing of the burden of proof on the defaulting trustee are not, however, quite the end of the matter. The kind of account ordered in this case is an account of profits, that is a procedure to ensure the restitution of profits which ought to have been made for the beneficiary and not a procedure for the forfeiture of profits to which the defaulting trustee was always entitled for his own account. That is Mr. Cogley’s case and I agree with him on this point. Even when the fiduciary is not fraudulent, the profit obtained from the breach of trust has to be defined. It may indeed be derivative, as where a trustee misappropriates trust property and then sells it and make a profit out of something else. But equity does not take the view that simply because a profit was made as part of the same transaction the fiduciary must account for it. I can give an example of that. In Giddings v Giddings (1826) 3 Russ 241, 38ER 547, a tenant for life renewed a lease belonging to the trust. The renewed lease, however, included land which had not been within the original lease. Sir John Copley MR dealt with the point briefly. He held that the remaindermen were only entitled to the benefit of the lease so far as it related to the land originally leased to the tenant for life. Another example is Docker v Somes (1834) 2My2k 655 at 688, 39ER1095 at 1099, where Lord Brougham expressed the view that in some circumstances a trustee who had applied considerable skill and labour to trust property which he had misapplied would be awarded a share of the product of his skill and labour: “Mr. Solicitor General […] might have taken the case of trust money laid out in purchasing a piece of steel or skein of silk, and these being worked up into goods of the finest fabric, Birmingham trinkets or Brussels lace, where the work exceeds by 10,000 times the material in value. But such instances, in truth, prove nothing; for they are cases not of profits upon stock, but of skilful labour very highly paid; and no reasonable person would ever dream of charging a trustee, whose skill thus bestowed had so enormously augmented the value of the capital, as if he had only obtained from it a profit; although the refinements of the civil law would certainly bear us out, even in charging all gains accruing upon those goods as in the nature of accretions belonging to the true owners of the chattels.” 86. In the present case, any recognisable contribution made by Mr. Al-Saraj was to the business of the joint venture. As the Warman case shows, there can be particular difficulty applying the above principles where the trustee mixes trust property with his own business. The profit which belongs to the trust has to be disentangled from that which belongs to the defaulting trustee because it is a profit of his business. I have explained above how these difficulties were resolved in the Warman case by limiting the account to two years’ profits. The problem in the Warman case has also faced courts within our own jurisdiction. In Vyse v Foster (1872) 9 Ch App 309, one of the partners in a business died but his capital remained in the business and was thus used by the surviving partners. One of the residuary legatees of the deceased partner sought an account of the share of the profits of the business to which she was entitled. The matter came before James and Mellish LJJ. (Mellish LJ did not deliver a separate judgment). This court was prepared in principle to ascertain the share of the profits of the business but when it came down to working out how this was to be done this court decided that the appropriate remedy would be to order repayment of the capital with interest. In his judgment, James LJ held that the share of profits to which the plaintiff was entitled could not simply be ascertained by working out the proportion of the capital to which she was entitled: “But it was pointed out by Vice-Chancellor Wigram, in the case of Willett v. Blanford (1), and his judgment was afterwards repeated and approved of by the Lords Justices, that there was no rule for apportioning the profits according to the respective amounts of the capital, but that the division would be affected by considerations of the source of the profit, the nature of the business, and the other circumstances of the case. It is obvious that it must be so, for it would be easy to suggest a number of instances in which the profit of a business has no ascertainable reference to the capital – e.g., solicitors, factors, brokers, or, as was the case before the Lords Justices, bankers. Indeed, in almost every case where the business consists of buying and selling, the difference between prosperity and ruin mainly depends on the skill, industry, and care of the dealers; no doubt also greatly on their credit and reputation, and the possession of ready money to take advantage of favourable opportunities and to enable them to bide their time in unfavourable states of the market, and also greatly on established goodwill and connection of the house.” In the end, as I have said, James LJ held that it would be too difficult to work out the share of profits to which the legatee was entitled and instead this court awarded her interest on her share of the residue to compensate her for the fact that her capital had been employed in the partnership business. 87. Does this line of authority help Mr Al-Saraj in this case? I think not. The hypothetical share, which the Murads would have given him if he had disclosed the set off arrangement, is not relevant to this argument because it was never actually agreed or put up as his contribution. Mr Al-Saraj under this approach would have to say that the £500,000 which he actually put up by way of set off should be treated as his investment in the joint venture. But that was the very sum that he lied to the Murads about. It was not a cash sum as they had been led to believe and accordingly I do not consider that he can say that he is entitled to an order which treats the £500,000 as his contribution to the profits made by the venture. 88. It would, however, be open to Mr Al-Saraj to apply to the court for an allowance for his services and disbursements, as indeed he did. The order of 12 July 2004 makes an allowance for his remuneration for managing the hotel. It is well established that, on the taking of an account, the court may make an allowance for the skill and efforts of the defaulting trustee: see, for example, Re Jarvis, dec’d [1958] 1 WLR 815, Boardman v Phipps [1967] 2 AC 46. This is common ground. The grant of an allowance is discretionary: see, for example, Poppet v Shonchhatra [1997] 1 WLR 1367 and the Warman case at page 562. The allowance in the account of the sum of £500,000 89. On the judge’s findings, the sum of £500,000 was treated as a cost of the acquisition in its entirety and it was accordingly allowed as a deduction from the profits for which Mr Al-Saraj was to account. But it is said that this overlooks the fact that some £369,000 was a commission earned by Mr Al-Saraj on the acquisition of Parkside Hotel for which he should account as a secret profit. On the judge’s findings, no objection can in my judgment be taken to the allowance of the balance of the £500,000, namely the £131,000. The judge found that this sum was one of the costs of acquisition. 90. The claim for an account of the £369,000 is in my judgment unanswerable on general principles unless of course the claim to recover that sum belongs to Danescroft. I now turn to that issue. The proper claimant in respect of the secret commission 91. The claim raised on this appeal is a new one, and thus is not covered by the judge’s finding that no fiduciary duty was owed to Danescroft. The fiduciary duty now relied upon arises out of the sale of the hotel to Danescroft. One possible conclusion is that a fiduciary duty was owed to both Danescroft and the Murads. Mr Cogley relies on Johnson v Gore Wood for the proposition that, in that event, Danescroft’s claim will trump that of the Murads. This point should have been raised at trial or at the hearings immediately thereafter. However, as it was a discrete point of law, I do not consider that it should not be raised in this court provided that any prejudice to the respondents can be resolved. In my judgment, that prejudice can be resolved by remitting the issue of whether the claim to recover the commission is vested in Danescroft to the judge on terms that the appellants should join Danescroft as a defendant. I would also give leave to Danescroft, if so advised, to file its own claim to recover the sum of £500,000. The pleading point 92. Mr Cogley submits that the Murads’ allegation that Mr Al-Saraj represented to them that his £500,000 contribution would be made in cash was not pleaded. However, this caused no prejudice to the appellants. The pleading point accordingly affords no basis for challenging the judge’s judgment. Miscellaneous issues 93. I do not consider that the sum of £225,817.99 contribution entitled Mr Al-Saraj to any profit share. This contribution is recorded in the Westwood agreement. The parties did not take any steps at this point to adjust their profit shares. In those circumstances, I accept Mr Newey’s submission that it was not intended by the parties that this contribution should give rise to any profit share. I do not see why the position should be different because the Murads have successfully challenged Mr Al-Saraj’s right to a profit share arising out of his contribution of £500,000. 94. I see no basis on which the amount of £131,000 (being the sum of £500,000 less than £369,000) implies a profit share. As I have said, the parties did not regard the sums contributed by them to the funding of the purchase of the hotel as giving rise to a profit share. Disposition