On 29 July 2013, the Court of Appeal (Mummery, Lloyd and Fulford LJJ) handed down judgment on Ross River's appeal against a decision of Morgan J pursuant to which its claim against the Second Defendant in the proceedings, a Mr Barnett, ended at first instance in no order being made against him. The Court of Appeal unanimously allowed the appeal and held that Ross River was entitled to an award of substantial equitable compensation.
The appeal represents the culmination of a hard-fought four-year legal battle over the proceeds of a property development joint venture project. In 2004, Ross River entered into a joint venture agreement (JVA) with the First Defendant (WCL). The basic terms of the JVA were that WCL would carry out (and have control over) a property development project, the net profits of which were to be shared with Ross River. WCL was controlled, in turn, by Mr Barnett, who was also to receive a management fee for his role in managing the project.
Disputes between the parties arose and were tried by Morgan J in 2011. There were a large number of points of dispute, but for present purposes the key ones were (a) a dispute about the quantum of net profits that Ross River was entitled to as against WCL and (b) a dispute about whether Mr Barnett was personally liable to Ross River for breach of fiduciary duty. Ross River's case on the latter point was that Mr Barnett personally owed it fiduciary duties, and had breached those duties by causing WCL to make payments and incur liabilities to third parties (very often connected to Mr Barnett himself) which had nothing to do with the development project, with the result that WCL was heavily insolvent and unable to pay out to Ross River its share of the net profits.
In the course of two judgments ([2012] EWHC 81 and [2012] EWHC 2487), Morgan J held that (a) Ross River was entitled to £1,043,926 as against WCL in respect of its share of the net profits, (b) both WCL and Mr Barnett personally owed fiduciary duties to Ross River, but (c) no equitable compensation was payable by Mr Barnett. The reasoning which led Morgan J to that latter conclusion was complex, but a key factor was his analysis that the legal fees which Mr Barnett had caused WCL to incur in connection with the litigation itself - which in the judge's view did not involve any breach of duty - would have rendered WCL insolvent in any event, thus giving Mr Barnett a causation defence.
On appeal, Mr Barnett contended that Morgan J had been wrong to hold that he had been a fiduciary at all. Conversely, Ross River argued that the judge had failed to follow through his finding that Mr Barnett was a fiduciary to its logical conclusion, and had erred in his analysis of the legal fees issue.
Agreeing with Ross River on almost every point, the Court of Appeal upheld Morgan J's finding that Mr Barnett owed fiduciary duties to Ross River, but held that the judge had erred in his application of those duties to the facts of the case. The appeal was accordingly allowed and Morgan J's order that no equitable compensation was payable by Mr Barnett was replaced with one requiring him to pay approximately £1m to Ross River.
The Court of Appeal's judgment, delivered by Lloyd LJ, contains valuable guidance on a number of topics, including (a) the circumstances in which fiduciary duties will arise in commercial contexts, (b) the circumstances in which individuals that control companies will owe fiduciary duties to third parties with which those companies deal, (c) the effect of a finding that one party owes fiduciary duties to another on the burden of proof as between those parties, and (d) the circumstances in which causing a company to incur expense in defending a claim may itself amount to a breach of duty.
David Caplan appeared for Ross River, instructed by Mishcon de Reya LLP.