The UK Supreme Court’s decision in Stevens v. Hotel Portfolio II UK Ltd[1] has clarified the liability of dishonest assistants in cases of breaches of a constructive trust of secret profits. It also provides helpful guidance on determining liability in cases of successive breaches of fiduciary duties, specifically in relation to the application of the compensatory principle and ‘but for’ test, and the availability (or lack thereof) of a right to set off gains against losses caused by the breaches.
Background
The case concerned the sale of three hotels by Hotel Portfolio II UK Ltd (HPII). The hotels, which had significant development potential, were sold by HPII to Cambulo Madeira. Cambulo Madeira was ostensibly owned by Anthony Stevens but, in reality, Stevens was acting as a nominee for Andrew Ruhan, a director of HPII. After acquiring the hotels, Cambulo Madeira sold them, generating a profit of approximately £102 million for Ruhan. These profits were subsequently dissipated by Ruhan, primarily to pay down loans on overseas property schemes that ultimately failed. Stevens played a key role throughout, assisting Ruhan in both the acquisition and sale of the hotels, as well as in the subsequent dissipation of the profits. He received payment of £1.5 million for this assistance.
By the time the case reached the Supreme Court, the following facts were settled:
- Ruhan, as a director, owed fiduciary duties to HPII and had breached those duties by failing to disclose his interest in Cambulo Madeira and by making the secret profit of £102 million;
- Upon receipt of the secret profit, a constructive trust arose over that fund in favour of HPII, with Ruhan as constructive trustee.
- Ruhan then breached his duties as trustee of that constructive trust by dissipating the fund.
- Stevens had dishonestly assisted in all Ruhan’s breaches.
Importantly, the judge at first instance had determined that the hotels had been sold by HPII to Cambulo Madeira for fair market value, and that HPII would not have realised a greater sum in another sale.
The issue before the Supreme Court
The issue before the Supreme Court was whether Stevens, as a dishonest assistant, could be held liable for the full £102 million profits dissipated by Ruhan, or only for the £1.5 million profit he personally received. The High Court found Stevens liable for the entire sum, but the Court of Appeal disagreed, finding that Stevens was only liable for the £1.5 million profit.
The thrust of Stevens’ submissions before the Supreme Court were:
- The constructive trust that arose over the £102 million secret profit was, in substance, a remedy for the earlier breach of Ruhan’s fiduciary duty as director of HPII. That makes it a very particular type of trust, the breach of which should be considered in its overall context, and should not give rise to the usual compensatory remedies that would generally be available to beneficiaries of constructive trusts.
- It is now an established equitable principle when quantifying liability for a breach of trust or fiduciary duty that the liability should be compensatory. The court must, therefore, carry out a ‘but for’ analysis – i.e., it must consider what the beneficiary’s position would have been had the breach not occurred. In this case, due to the connection between the breach that resulted in the profit, and the breach that resulted in its dissipation, it is necessary for the court to consider what HPII’s position would have been had Ruhan committed neither breach. The answer to that is that HPII’s position would have been exactly the same: It would neither have gained the profit (as beneficiary of the constructive trust), nor would it have lost it. Accordingly, HPII had suffered no loss.
- Finally, while there is an established equitable principle that trustees and fiduciaries may not set off breaches which make gains for the beneficiaries against breaches which cause losses to them, that principle is subject to an exception if the breaches are sufficiently connected. The breaches in this case could not be more closely connected, so the gain made by HPII when it became beneficial owner of the secret profit should be set against the loss made when that profit was subsequently dissipated. A net-zero result.
The Supreme Court’s decision
By a majority of 4 to 1, the Supreme Court restored the High Court’s decision, holding Stevens liable for the full £102 million: The £102 million secret profit had belonged to HPII and was lost when Ruhan dissipated it; Stevens, as a dishonest assistant in Ruhan’s dissipation in breach of the constructive trust, was liable for the loss that arose.
The court rejected the argument that the constructive trust was a form of remedy – the constructive trust is equity’s automatic and immediate response to Ruhan’s receipt of the secret profit. It should, the court reasoned, be supposed that there should be some useful effect and function to the imposition of the trust, and that it was the court’s role to validate rather than inhibit that effect. There was nothing in the (scant) case law on constructive trusts of secret profits that supported the argument that a breach of such a trust should not give rise to a compensatory remedy, and, in the court’s opinion, this would be entirely inconsistent with recent judicial thinking about constructive trusts in the bribery context. In a case such as this, equity imposes the constructive trust a vital means of recourse for compensation for loss caused by the dissipation of the secret profit. To achieve this, equity imposes the usual obligation on the constructive trustee not to dissipate the trust property and the usual obligation on both them, and upon any dishonest assistant in the dissipation, to compensate the beneficiary for any loss caused thereby.
Regarding compensatory liability, the court agreed that applying a ‘but for’ analysis is the correct approach but clarified that it must be applied to each breach of duty separately, not to the overall transaction. In this case, HPII suffered no loss in respect of Ruhan’s initial breach and in fact its position was improved, as it became the beneficial owner of the £102 million profit; however, when Ruhan subsequently dissipated those profits in breach of trust, HPII suffered a loss, as the fund and its traceable proceeds were no longer available. The court found nothing in the case law on the ‘but for’ analysis that supported the contention that the breaches should be aggregated.
Finally, the court confirmed the usual equitable principle that gains and losses arising from successive breaches of trust cannot be set off against each other. It also confirmed that there is an exception to this principle. However, the court asserted that the exception does not arise simply because the breaches are connected, but will only arise in cases where disallowing a set-off would be inequitable. No such inequity arose here – a dishonest assistant was simply being held liable for assisting in the breach of a constructive trust.
Takeaway
Given that Stevens was found liable to HPII for £102 million when (at least to the person on the street) HPII didn’t suffer any overall loss, this judgment is not without some controversy. But what would the alternative have been? As noted in the judgment, equity must have intended that the constructive trust of a secret profit have some useful effect, and the court must validate that. To hold that the trust was somehow other, and did not give rise to compensatory remedies in the ordinary course, would have been a highly unattractive result. The judgment, odd though the result may at first blush appear, should be embraced as demonstrating the English court’s robust approach to the rigid application of vital equitable principles.
[1] [2025] UKSC 28.
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