Cayman Islands News Bureau Ltd v Cohen

• Jurisdiction: Cayman Islands
• Judge: (Harre, J.)
• Judgment Date: 19 December 1989
• Court: Grand Court (Cayman Islands)
• Date: 19 December 1989

Grand Court

(Harre, J.)

CAYMAN ISLANDS NEWS BUREAU LIMITED

and

COHEN and COHEN ASSOCIATES LIMITED

P. Lamontagne, Q.C. and G.F. Ritchie for the plaintiff;

R.D. Alberga, Q.C. and R.L. Nelson for the defendants.

Cases cited:

(1) Barber, In re, Burgess v. VinicomeELR(1885), 34 Ch. D. 77, dicta of Chitty J. applied.

(2) Barrett v. Hartley(1866), L.R. 2 Eq. 789; 14 L.T. 474.

(3) Boardman v. Phipps, [1967] 2 A.C. 46; [1966] 3 All E.R. 721.

(4) Midland Bank Trust Co. v. Green (No. 3), [1982] Ch. 529; [1981] 3 All E.R. 744, dictum of Lord Denning, M.R. applied.

(5) O”Sullivan v. Management Agency & Music Ltd., [1985] Q.B. 428; [1985] 3 All E.R. 351, dicta of Fox, L.J. applied.

(6) Robinson v. PettENR(1734), 3 P. Wms. 249; 24 E.R. 1049.

Trusts-constructive trusts-breach of fiduciary duty-fiduciary not to profit from fiduciary relationship above specified remuneration-court may nonetheless grant allowance for work and efforts productive of overall profit to beneficiary and may refuse relief to dishonest fiduciary

Trusts-constructive trusts-breach of fiduciary duty-accounts-fiduciary to account to beneficiary for profits made in breach of fiduciary duty-even if fiduciary makes losses, beneficiary entitled to benefit of irresponsible, extravagant or personal expenses but fiduciary entitled to allowance for reasonable business expenses

The plaintiff brought an action against the defendants for breach of fiduciary duty.

The first defendant had been the managing director of the plaintiff company. Whilst employed by the plaintiff he had secretly encouraged its major client to transfer its contracts to a company (the second defendant) which he set up. The plaintiff successfully brought an action against him for breach of fiduciary duty and both defendants were held accountable for the contracts. These proceedings are reported at 1988–89 CILR 195.

As a consequence of that judgment the first defendant was required to submit the accounts for his company. These show that the company had been running at a financial loss and enumerated several items which were disputed by the plaintiff. These included among other things the first defendant”s salary, the salary of his wife who was an employee, allowances for entertainment, conferences, directors” expenses other than salaries and fees, travel, legal costs, and the use of an apartment in Miami. The court then examined those accounts to determine the profits for which the defendants must account.

The plaintiff filed a notice of objection alleging that all of the expense items in the account were erroneous on the ground that, in law, the defendants were not entitled to charge any expenses, whether actually incurred or not and whether deemed necessary or not. Alternatively, it objected to specific items or groups of items of expenses.

Held, ruling on the accounts submitted:

(1) Although it was the general rule that a fiduciary should not be allowed to make a profit out of his fiduciary relationship or to enrich himself over and above the remuneration specified in the relationship, there were circumstances in which it would be inequitable to apply the

rule strictly. The court could in such cases grant an allowance to the fiduciary in recognition of his work and efforts without which the overall profit to the beneficiary would not have been possible. Each case had to be considered on its facts with the aim of ensuring that the beneficiary got the profits to which he was entitled. However, even though the punishment of a fiduciary who had breached his tmst was not within the scope of the remedy, the court could refuse relief where there has been dishonesty, surreptitious dealing or other improper conduct (page 545, lines 24–39; page 547, lines 19–30).

(2) In the present case the defendants were entitled to an allowance for reasonable expenses incurred in conducting their business and this had to be calculated in the context of the state of solvency of the company. Since it had been operating at a loss it could itself make no account for profits but the court would examine its running expenses and would reduce by an appropriate amount all expenses in the account which it found to be irresponsible or extravagant on the part of the first defendant, or purely for his personal benefit or the benefit of others associated with him. Specifically, the court would order a reduction in the first defendant”s salary claim, in his other ‘directors” expenses,’ entertainment, travel and conference allowances; a reapportionment of the allowable legal costs shared by the company and the first defendant since it was entirely his fault that the company was involved in legal proceedings; and a cancellation of the amount claimed for the use of the apartment in Miami. The amount to which the total of these expenses was reduced would be the benefit to which the plaintiff was entitled from the first defendant. On the other hand, the salary to the first defendant”s wife as a responsible employee was a reasonable one and an allowable cost and was therefore not to be regarded as a profit to the first defendant (page 548, lines 6–15; page 553, lines 11–27).

HARRE, J.: This is a decision on an accounting enquiry which
was a consequence of a judgment which I delivered on November
40	24th, 1988. I then found that the defendants were in breach of
their fiduciary duty to the plaintiff (‘CINB’). The facts are fully

set out in my 1988 judgment, but the following passage describes
the substance of it (1988–89 CILR at 198):
“The essence of the plaintiffs allegation against Mr. Cohend
is simply this: That while he was ostensibly faithfully engaged
5	on behalf of CINB in carrying out his duties, including work
related to the submission of that company”s 1987 budget to
the Government, he had already been told, in the spring of
1986, that it had been decided by the Government that no
further contract would be awarded to CINB and had been
10	requested by the Government to prepare a proposal of his
own; and that he thereupon whilst still employed with CINB
as Managing Director not only kept this knowledge to
himself but surreptitiously prepared and successfully sub-
mitted to the Government on his own behalf a proposal for
15	the provision of services to the Government in direct
competition to those then being provided by CINB.’
The proposal which Mr. Cohen successfully submitted to the
Government was that he should provide public relations and
promotion services for a fixed sum of $300,000 per annum. That
20	was not only lower than the proposed CINB budget for 1987 but
also lower than the budget for 1986.
Very comprehensive accounts have been produced. They show
that Cohen Associates Ltd. (‘the company’) has been running at
a loss and is insolvent. There are disputes about a number of
25	items in the accounts, but by far the most important issue is the
extent of the entitlement of Mr. and Mrs. Cohen to remuneration
for the work which they have done under the contract with the
Government, and another contract which they obtained with
Cayman Airways Ltd. (‘CAL’). That issue was one of legal
30	principle. It was expressed thus in the plaintiff”s notice of
objection to the accounts:
‘[T]he plaintiff alleges that all of the expense items in the
account of Cohen Associates Ltd. are erroneous on the
ground that, in law, Cohen Associates Ltd. is not entitled to
35	charge any expenses, whether actually incurred or not and
whether deemed necessary or not.’
In the alternative the plaintiff objected to specific items or groups
of items of expenses.
The accounts of the company show that it had made a loss of
40	$102,926.31 as at March 31st, 1989. The plaintiff says that only
when the accounts are rectified to show a notional profit can the

court consider whether there is room for an allowance for Mr.
and Mrs. Cohen in accordance with the principles to which I shall
now refer.
The general rule, to which there are numerous exceptions, is
5	that a trustee has no right to exact anything for his services, even
where those services have been of great advantage to the
beneficiary of the trust. See Robinson v. Pett (6) and Barrett v.
Hartley (2). The reason behind the principle was expressed by
Chitty, J. in In re Barber, Burgess v. Vinicome (1) in the following
10	terms, which are pertinent to the present matter (34 Ch. D. at
81):
‘That principle is based upon this consideration, that the
Court of Equity will not allow a man to place himself in a
position in which his interest and duty are in conflict. If it
15	were not the rule, a trust estate might be heavily burdened
by reason of business being done by a trustee or executor
employing himself as commission agent for the estate. The
difficulty would be in saying in each particular case that the
business was not required to be done. But, without consider-
20	ing the grounds of the principle-it is a well-established
principle.’
The development of the rule was due in part to the fact

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