Equity

Fiduciary duty - Duty not to profit from position of trust

Cadogan Petroleum plc and other companies v Tolley and others: Chancery Division (Mr Justice Newey): 12 September 2011

On 19 June 2009, the claimant companies (which comprised a group of companies in the business of the exploration and exploitation of gas reserves, in particular in Ukraine) commenced proceedings against the defendants. The first claimant was then the ultimate holding company.

The fourth defendant, a Ukranian national, was the chief operating officer of the claimants between 2007 and 2009. The fifth defendant was a Delaware company, owned and controlled by the fourth defendant. The claims against the fourth and fifth defendants included claims in respect of the receipt of secret commissions by the fourth defendant in respect of certain transactions entered into on behalf of the companies, dishonest diversion of purchase consideration paid to other companies by the claimants, and expenses claims made by the fourth defendant.

The relief sought included declarations that various sums of money or their traceable proceeds were held on trust for the claimants (the proprietary claims). On the same day the proceedings were issued, worldwide freezing injunctions were granted against the fourth and fifth defendants on a without notice basis. Those injunctions were subject to a limit of £15m and contained proprietary injunctions related to two of the claims.

Those injunctions were continued on the specified return date of 29 June, and in respect of additional claims on 12 February 2010. The fourth and fifth defendants (the defendants) were the only ones who actively defended the proceedings. The other defendants either failed to acknowledge service or had entered into settlements with the claimants.

The trial was due to take place in May/June 2012. In the meantime, the parties sought resolution of certain matters.

Some of those matters were adjourned whilst others were dealt with by agreement. The matters that remained to be decided were: (i) whether the proprietary claims made by the claimants should be disposed of summarily and related parts of the freezing injunctions deleted; (ii) whether the maximum sum specified in the freezing injunctions should be altered; and (iii) whether disclosure of records of certain interviews carried out by a solicitor's firm (DL) on behalf of the claimants should be ordered.

The defendants contended that the decisions of the High Court and the Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Group plc (see [2010] All ER (D) 10 (Jul) and [2011] All ER (D) 231 (Mar)) (Sinclair) rendered unsustainable the proprietary claims advanced by the claimants in respect of the relevant claims.

As a result, the defendants claimed that they should be given summary judgment in respect of those claims or those claims should be struck out. On the same basis, the defendants requested that the proprietary elements of the freezing injunctions be deleted. The defendants further sought specific disclosure of certain interviews mainly of the claimants' employees.

The claimants opposed the application for disclosure on the basis that litigation privilege applied. The defendants contended that: (a) litigation privilege never arose because the conditions for it were not satisfied; (b) the fourth defendant had in any case been entitled to see privileged material as a shareholder in the first claimant; and (c) any privilege had been waived.

The court ruled: (1) In the light of established authority, a beneficiary of a fiduciary's duties could not claim a proprietary interest in respect of any money or asset acquired by a fiduciary in breach of his duties to the beneficiary, unless the asset or money was or had been beneficially the property of the beneficiary or the trustee had acquired the asset or money by taking advantage of an opportunity or right which had properly been that of the beneficiary (see [27] of the judgment).

In all the circumstances, the claimants had no real prospect of succeeding on their proprietary claims. In agreement with the defendants, having regard to the Sinclair case, the proprietary claims would fail even if the claimants had established the pleaded facts.

Further, there did not appear to be any other compelling reason why the claims should be disposed of at trial rather than at the instant hearing. It followed that summary judgment would be given in favour of the defendants with regard to the proprietary claims relating to the claims in question. Further, the proprietary elements of the freezing injunctions would also be deleted (see [39] of the judgment).

The dismissal of the relevant proprietary claims meant that there was, on that aspect, no longer any serious issue to be tried (see [39] of the judgment).

A-G for Hong Kong v Reid [1994] 1 All ER 1 doubted; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (in admin) [2011] All ER (D) 321 (Mar) applied; Metropolitan Bank v Heiron (1880) 43 LT 676 considered; Lister & Co v Stubbs [1886-90] All ER Rep 797 considered; Caerphilly Colliery Co, Re, Pearson's Case (1877) 5 Ch D 336 considered; Paragon Finance plc v Thakerar & Co, Paragon Finance plc v Thimbleby & Co (a firm) [1999] 1 All ER 400 considered; Daraydan Holdings Ltd v Solland International Ltd [2004] All ER (D) 507 (Mar) considered; Halton International Inc v Guernroy Ltd [2006] All ER (D) 302 (Jun) considered.

(2) It was settled law that litigation privilege 'relates only to communications at the stage when litigation is pending or in contemplation, and only those made for the sole or dominant purpose of obtaining legal advice or conducting that litigation'.

In order for a document to be protected by litigation privilege two conditions had to be satisfied. First, at the time that the document in question had been created, litigation should be reasonably in prospect and not a mere possibility. It was not sufficient that there was a 'distinct possibility that sooner or later someone might make a claim', or that there had been 'a general apprehension of future litigation'.

However, it was not necessary to show that there had been more than a 50% chance of litigation. Secondly, the documents in question should have been made with either the sole or, at least, the dominant purpose of using it for obtaining advice about actual or anticipated litigation.

Evidence in support of a claim for privilege would be conclusive unless it was reasonably certain from: (a) the statements of the party making it that he had erroneously represented or had misconceived the character of the documents in respect of which privilege was claimed; (b) the evidence of the person who or entity which had directed the creation of the communications or documents over which privilege was claimed that the affidavit was incorrect; and (c) the other evidence before the court that the affidavit was incorrect or incomplete on the material points (see [49], [50] of the judgment).

In the instant case, before the relevant interviews had begun to be conducted, DL's work had been for the dominant purpose of litigation. It followed that the claimants' claim to privilege was a proper one on the basis that litigation privilege would have extended to the interviews at issue.

Further, the fourth defendant could not insist on seeing the interview notes as a former shareholder in circumstances where the interviews had been conducted in contemplation of litigation against a person whom the first claimant had then alleged had been engaged in a conspiracy with the fourth defendant.

At that time, whether or not the claimants had known it, the interests of the first claimant and the fourth defendant (in his capacity as a shareholder) had been adverse. Furthermore, in all the circumstances, privilege in the interviews had been waived by the claimants on the basis that in relying on those interviews when applying for the freezing injunctions, DL's affidavit had not merely stated that those interviews had taken place, but had referred in some detail to the content of what the interviewees had said.

Moreover, the claimants had relied on DL's affidavit in support of the freezing injunction (and hence on the interview material) to advance their position in respect of the freezing injunction (see [53], [54], [59] of the judgment).

Woodhouse & Co Ltd v Woodhouse (1914) 30 TLR 559 applied; Nea Karteria Maritime Co v Atlantic and Great Lakes Steamship Co (No 2) [1981] Com LR 138 applied; Arrow Trading & Investments Est 1920 v Edwardian Group Ltd [2004] All ER (D) 373 (May) applied; Brennan v Sunderland City Council [2008] All ER (D) 192 (Dec) applied; West London Pipeline and Storage Ltd v Total UK Ltd [2008] All ER (D) 294 (Jul) applied; AXA Seguros SA De CV v Allianz Insurance plc (t/a Allianz Global Risks) [2011] All ER (D) 202 (Mar) applied; Digicel (St Lucia) Ltd v Cable and Wireless plc [2009] All ER (D) 44 (Jul) considered.

(3) In all the circumstances, it was appropriate to reduce the maximum sum specified in the freezing injunctions by only a modest amount, to $22m (see [45] of the judgment).

Richard Morgan QC and Thomas Munby (instructed by Dewey & LeBoeuf LLP) for the claimants. Richard Millett QC, David Davies and Anton Dudnikov (instructed by Holman Fenwick Willan LLP) for the defendants.