[1988–89 CILR 475]
GRAND COURT (Harre, J.): October 20th, 1989
Companies—managers—breach of fiduciary duties—senior manager deemed constructive trustee of contracts made in breach of duty to company—profits from contracts subject of trust but not contracts themselves—company not entitled to terminate contracts made in breach of duty or substitute itself as contracting party
    The plaintiff company sought an order establishing the meaning and effect of declarations made in its favour in earlier proceedings in which the first defendant was found to have been in breach of his fiduciary duty to it.
    The plaintiff had successfully brought an action for breach of fiduciary duty against its former Managing Director, the first defendant, who had secretly procured contracts with two of its clients for his own company, the second defendant. It obtained declarations to the effect that both defendants were trustees for the plaintiff “of all contracts to provide public relations and sales promotion services” made between either of them and the clients in question, namely the Government and Cayman Airways Ltd.
    The accompanying orders required, inter alia, that the defendants account to the plaintiff for all fees, remuneration and other profits received by and payable to them in respect of the contracts and that, in their respective capacities, they pay to the plaintiff all moneys found to be due to it on the taking of such accounts. These proceedings are reported at 1988–89 CILR 195.
    In the present proceedings, the plaintiff sought to establish that the declarations meant that the defendants were trustees of the contracts in the fullest sense and for all purposes, not merely for the purposes of the specific orders previously made by the court. It therefore sought an injunction restraining the defendants from providing the particular services to the other contracting parties or receiving any fees, remuneration or profits for such services.

1988–89 CILR 476
    The plaintiff submitted that (a) in making the declarations, the court had accepted that there was a trust relationship in existence between itself and the defendants; (b) this trust relationship was one involving a “full trust” subject to the principles and rules ordinarily governing that institution as applicable to the duties of trustees and the rights of beneficiaries, including the right of a sole beneficiary to terminate the trust; and (c) by an application of those principles the defendants’ contracts were held upon the same trust as that governing the first defendant’s contract as its Managing Director and it followed that it was entitled to terminate the trust relationship at will with the consequent termination of the contractual relationship between the defendants and the other contracting parties; and further (a claim later abandoned) that it was entitled to substitute itself as the contracting party in place of the defendants.
    The first defendant submitted in reply that (a) the relationship which was created by the service contract between the plaintiff and himself was that of employer and Managing Director/employee and not that of beneficiary and trustee; nor was he at any stage a trustee for property belonging to the plaintiff; (b) his position with the plaintiff imposed upon him a fiduciary duty to the plaintiff and nothing more; (c) he had been in breach of that duty when he entered into private contracts with its clients for which the only available remedy was accountability for profit; and (d) by ruling that he and his company were trustees of the contracts, the court had sought only to bring the case clearly within the principle of accountability on the basis of a constructive trust; accordingly the declarations were granted specifically for the purpose of making that remedy available against them and were not intended to give the plaintiff any further general or specific rights and in particular no proprietary rights over those contracts.
    Held, ruling on the proper interpretation of the previous order:
    (1)    The description of the first defendant (and by extension his company) as “trustees” was a specific use of the word in the context of his general obligation as a senior manager not to place himself in a position in which his duty and interest might conflict, since it was a fundamental rule of equity that a person in a fiduciary position should not be allowed to abuse that position for private gain. Equity therefore imposed a constructive trust as the basis for liability in the case of a breach of fiduciary duty and the declaration by the court to that effect was merely an acknowledgment of the existence of this special relationship and its obligations. What remained was for the court to consider not whether a “full trust” existed but what it was that was impressed with the trust and what were the obligations arising from it (page 481, line 10 – page 482, line 17).
    (2)    By declaring that the defendants were trustees for the plaintiff of “all contracts” with the Government and Cayman Airways Ltd. involving the provision of public relations and sales promotion services, the court was referring specifically to the defendants’ liability as constructive trustees to account to the plaintiff for the profits they had

1988–89 CILR 477
received and would receive in relation to those particular contracts. Whereas the first defendant’s breach was sufficient to entitle the plaintiff to those profits, the contracts out of which they arose were not themselves the subject of a trust. Accordingly, the plaintiffs rights were restricted to enforcing the defendants’ obligations to account for profits and could not be extended to affect the contracts directly, as by allowing the plaintiff to terminate them or substitute itself as a contracting party. The court would therefore make another declaration stating clearly that the defendants were constructive trustees for the benefit of the contracts only for the purposes of the orders made in the earlier proceedings (page 482, line 40 – page 483, line 29).
Cases cited:
  (1)    Att. Gen.’s Reference (No. 1 of 1985), [1986] 2 All E.R. 219, considered.
  (2)    Boardman v. Phipps, [1967] 2 A.C. 46; [1966] 3 All E.R. 721, dictum of Lord Upjohn applied.
  (3)    Industrial Dev. Consultants Ltd. v. Cooley, [1972] 1 W.L.R. 443; [1972] 2 All E.R. 162, followed.
  (4)    Keech v. Sanford (1726), Sel. Cas. Ch. 61; 25 E.R. 223; [1558–1774] All E.R. Rep. 230.
  (5)    Lister & Co. v. Stubbs (1890), 45 Ch.D. 1; [1886–90] All E.R. Rep. 797, considered.
  (6)    Marshall’s Will Trusts, In re, [1945] Ch. 217; [1945] 1 All E.R. 550, dictum of Cohen, J. considered.
  (7)    Saunders v. Vautier (1841), 4 Beav. 115; 41 E.R. 482; [1835–42] All E.R. Rep. 58.
  (8)    Scott, In re, [1948] S.A.S.R. 193.
  (9)    Swain v. Law Society, [1982] 1 W.L.R. 17; [1981] 3 All E.R. 797, dictum of Oliver, L.J. applied.
(10)    Tito v. Waddell (No. 2), [1977] Ch. 106; [1977] 3 All E.R. 129, dicta of Megarry, V.-C. applied.
P. Lamontagne, Q. C. and G. Ritchie for the plaintiff;
R.D. Alberga, Q.C. and R. Nelson for the defendants.

      HARRE, J.: On November 24th, 1988 I delivered a judgment 
  concerning the parties in this case (see 1988–89 CILR 195). I will 
  call the case and judgment “the 1988 case” and “the 1988 
  judgment” respectively. The facts are set out in detail in that 
35  judgment and it suffices at this point to refer to the following 
  passage from it (ibid., at 198): 
          “The essence of the plaintiffs allegation against Mr. 
      Cohen is simply this: That while he was ostensibly faithfully 
      engaged on behalf of CINB in carrying out his duties, 
40      including work related to the submission of that company’s 
      1987 budget to the Government, he had already been told, in 

1988–89 CILR 478

      the spring of 1986, that it had been decided by the 
      Government that no further contract would be awarded to 
      CINB and had been 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 submitted to the Government on his own 
      behalf a proposal for the provision of services to the 
      Government in direct competition to those then being 
10      provided by CINB.” 
      The 1988 judgment included a declaration that the first 
  defendant (“Cohen”) had been and was in breach of his fiduciary 
  duty to the plaintiff (“CINB”) and a declaration that he was a 
  trustee for CINB of all contracts to provide public relations and 
15  sales promotion services made between him (or any corporate 
  entity owned and controlled by him) and the Government of the 
  Cayman Islands (“the Government”) and Cayman Airways Ltd. 
  (“CAL”). There was also a declaration that the second defendant 
  (“Cohen Associates”) was a trustee for CINB of all contracts to 
20  provide public relations and sales promotion services entered into 
  by Cohen Associates with the Government or CAL. 
      The present issue concerns the meaning and effect of those 
  declarations. By an originating summons CINB seeks to establish 
  that they mean that the first and second defendants are trustees of 
25  the contracts for all purposes thereof and relating thereto and not 
  merely for the purposes of the orders for accounts to be taken and 
  related matters contained in the rest of the order. If that is so, 
  CINB claims that it follows that it was entitled to terminate the 
  trust relationships at will with the consequent termination of the 
30  contractual relationship between the defendants, the Government 
  and CAL. It also claims to be entitled to injunctions restraining 
  both defendants from providing public relations and/or sales 
  promotion services to the Government or CAL or receiving any 
  fees or remuneration or other profits from such services. 
35      It is convenient to set out the submissions of the parties as a 
  preliminary to any consideration of the issues of law involved. 
  The plaintiff argues as follows: 
      (a) The defendants cannot look behind the declarations. They 
  are res judicata or, at the least, irrebuttable issue estoppel. The 
40  principle and the authorities applied are merely examples of the 
  rigour of the rule laid down in Keech v. Sanford (4) and the 

1988–89 CILR 479

  modern cases following it. In Keech v. Sanford it was held that a 
  lease, entered into by the trustee personally, was held by him 
  upon the same trust as that governing the previous lease of the 
  same property which was subject to an express trust contained in 
a will. 
      (b) All the relevant definitions of “trust” and of the various 
  categories of trusts lead to the conclusion that the trust found to 
  exist in this dispute is a “full trust,” subject to the ordinary rules 
  governing that institution and where the ordinary duties of 
10  trustees apply and rights of beneficiaries thereunder prevail, 
  including the right of a sole beneficiary to terminate the trust 
  under the rule in Saunders v. Vautier (7). 
      (c) In situations such as the one now under consideration, the 
  courts cannot “impose” a trust or “impress” a given situation with 
15  a trust. Either there is a trust situation which the courts view and 
  recognize as such—usually through a declaration—or there is 
      (d) In such a situation, the courts cannot create a trust 
  according to their discretion as yet another equitable remedy 
20  which would take effect from the date of an order. That would be 
  contrary to well-established principle, and in any event unwork- 
  able, since there could be no breach of trust until the trust had 
  come into existence by fiat of the court. The court cannot provide 
  a remedy for breach of trust by bringing into existence after the 
25  event that very trust of which the breach is alleged. 
      The defendants made submissions which I summarize thus: 
      (a) The relationship which was created by the service contract 
  between CINB and Cohen was that of employer and Managing 
  Director/employee, not that of beneficiary and trustee. 
30      (b) Whilst he was employed by CINB there was no trust 
  property of CINB for which Cohen could be trustee. 
      (c) Cohen’s position with CINB put him in the position in 
  which he owed a fiduciary duty to CINB and nothing more. 
      (d) In obtaining the two contracts which were entered into by 
35  the Government and CAL respectively with Cohen Associates, 
  Cohen was in breach of his fiduciary duty to CINB. For a breach 
  of fiduciary duty the only remedy available is accountability for 
  profit. Cohen did not misuse or misappropriate any trust property 
  belonging to CINB which CINB beneficially owned and is 
40  entitled to take back. 
      (e) The declarations granted were for the purpose of declaring 

1988–89 CILR 480

  the defendants to be constructive trustees of the profits accruing 
  from the contracts and imposing a duty on Cohen to account for 
  those profits. They did not give the plaintiff nor were they 
  intended to give the plaintiff any further rights and in particular 
not the right to terminate the contracts between Cohen Associates 
  and the Government and CAL respectively. 
      (f) The liability attaching to Cohen Associates is only to 
  account to the plaintiff for the profits arising from the contracts. 
  CINB has no proprietary rights over the contracts. It is only a 
10  personal right as a creditor against the defendant company. 
      (g) The court’s finding that CINB was entitled to the 
  declarations which it sought was only for the purpose of bringing 
  the case clearly within the principle of accountability and to make 
  that remedy available against the defendants. 
15      For a judicial definition of “trust” I was referred to the following 
  passage from the judgment of Cohen, J. in In re Marshall’s Will 
  Trusts (6) ([1945] Ch. at 219) in which he adopts the definition in 
  Underhill’s Law of Trusts & Trustees, 8th ed., at 3 (1926): 
      “ ‘A trust is an equitable obligation, binding a person (who is 
20      called a trustee) to deal with property over which he has 
      control (which is called the trust property) for the benefit of 
      persons (who are called the beneficiaries or cestuis que 
      trusts), of whom he may himself be one, and any one of 
      whom may enforce the obligation.’ ” 
25  Another judicial definition, by Mayo, J. in In re Scott (8) ([1948] 
  S.A.S.R. at 196), has been adopted in Lewin on Trusts, 16th ed., 
  at 1 (1964) and referred to in Parker & Mellows, The Modern 
  Law of Trusts, 5th ed., at 6 (1983). According to this formulation, 
  the word “trust” refers to the duty or aggregate accumulation of 
30  obligations that rest upon a person described as the trustee. The 
  responsibilities are in relation to property held by him, or under 
  his control, and he will be compelled by a court of equitable juris- 
  diction to administer that property in accordance with the trust 
  instrument or, where there is no such valid provision, in accord- 
35  ance with equitable principles. It follows that the administration 
  must be in such a manner that the consequential benefits and 
  advantages accrue, not to the trustee, but to the cestuis que trust. 
      The form of the declaration made in the 1988 case followed 
  that which was sought in Industrial Dev. Consultants Ltd. v. 
40  Cooley (3). In that case Roskill, J. made an order for an account 
  because the defendant was able to make his profit as a result of 

1988–89 CILR 481

  having allowed his interests and his duty to conflict. The report of 
  the case does not indicate whether or not any order was made 
  which declared the existence of a trust. Indeed that matter is not 
  referred to at any point in the report. The Cooley case proceeded 
as an action by the plaintiffs for an account for breach of fiduciary 
  duty, the defendant denying there was any such duty or breach 
  and contending that if there were a remedy it lay in damages. It 
  was a case where a remedy was sought in personam, and in such 
  cases the authorities do not always distinguish the basis on which 
10  the fiduciary has been held liable. The explanation for this may be 
  that the distinction between a fiduciary who is bound to account 
  to another for property in his hands and a fiduciary who is a 
  trustee of property which is beneficially owned by another 
  becomes of practical importance only when the rights of third 
15  parties become involved, or where different periods of limitation 
  apply to actions in rem and in personam. Nevertheless, I believe 
  that it is now well established that the basis for liability in each 
  case is a constructive trust. 
      The matter was expressed as follows by Lord Upjohn in 
20  Boardman v. Phipps (2) ([1967] 2 A.C. at 123): 
      “The relevant rule for the decision of this case is the 
      fundamental rule of equity that a person in a fiduciary 
      capacity must not make a profit out of his trust which is part 
      of the wider rule that a trustee must not place himself in a 
25      position where his duty and his interest may conflict.” 
      I concur entirely with the view of both parties in the present 
  matter—although they draw very different conclusions from 
  it—that in making the declarations I was not bringing a trust into 
  existence as a remedy but merely confirming that one did exist. I 
30  need not pursue the question of whether, in relation to other 
  circumstances, the novel concept of trust as remedy has found its 
  way into our system of law. The present case concerns account- 
  ability for profits made by a person in a fiduciary position. In 
  making the order which I did in the 1988 case I was taking the 
35  view on the authorities that the liability to account rested upon a 
  constructive trusteeship save in those exceptional instances of 
  mere personal accountability illustrated by Lister & Co. v. Stubbs 
  (5) and Att. Gen.’s Reference (No. 1 of 1985) (1). The matter is 
  not entirely free from doubt, but it seems anomalous to extend 
40  the distinction between the use of position and the use of 
  property beyond the narrow confines of those cases. 

1988–89 CILR 482

      To be sure, a fiduciary may or may not have property vested in 
  him or under his control. Where a fiduciary qua fiduciary does 
  have property vested in him or under his’control, such property has 
  the essential characteristic of trust property, but in determining 
the rights and obligations in any particular case, it is not a matter 
  of drawing a distinction between a “full trust” and something less 
  than that, but of determining what it is which is impressed with 
  the trust and what the obligations arising from the trust are. As 
  Oliver, L.J. said in Swain v. Law Society (9) ([1981] 1 W.L.R. at 
10  37): 
      “[W]hat one has to do is to ascertain first of all whether there 
      was a fiduciary relationship, and if there was, from what it 
      arose and what, if there was any, the trust property was; and 
      then to inquire whether that of which an account is claimed 
15      either arose, directly or indirectly, from the trust property 
      itself or was acquired not only in the course of, but by reason 
      of, the fiduciary relationship.” 
      Nevertheless, in view of the submissions which the plaintiff’s 
  counsel made with regard to the unavoidable consequences of my 
20  use of the word “trust,” I cannot refrain from referring to the 
  following passage from the judgment of Megarry, V.-C. in Tito v. 
  Waddell (No. 2) (10). After referring to various senses in which 
  the word “trust” had been used, he said this ([1977] Ch. at 227): 
      “One cannot seize upon the word ‘trust’ and say that this 
25      shows that there must therefore be a true trust; the first 
      question is the sense in which that protean word has been 
      used. . . . 
          There is a further consideration, namely, the subject 
      matter of the alleged trust. That subject matter is the 
30      royalties and other payments which will become payable in 
      the future. What is to be held in trust is the fruits of the 
      transaction in question. What the plaintiffs are claiming is 
      that because (on their argument) the Crown will hold these 
      fruits in trusts, therefore the Crown is in a fiduciary position 
35      in relation to the transaction which in due time will produce 
      those fruits. This, said Mr. Vinelott, cannot be right. A trust 
      of a tree may impose a fiduciary duty in relation to the fruit 
      of that tree: but it would be remarkable if a trust of the 
      gathered fruit of the tree were to impose a fiduciary duty in 
40      relation to the tree itself.” 
      In the present case we are dealing with the circumstances 

1988–89 CILR 483

  where on my view of the matter equity intervenes by treating a 
  fiduciary as a constructive trustee. But the defendants are not 
  trustees of specific disposable property which they misappro- 
  priated and which they are under an obligation to return. In 
saying that Cohen and Cohen Associates were trustees of the 
  contracts I was saying in an elliptical and perhaps not entirely 
  felicitous way that they were, as constructive trustees, liable to 
  account for the profit from these contracts which they were 
  making because Mr. Cohen had allowed his duty and his interest 
10  to conflict. I expressed my conclusions as having been in 
  accordance with my analysis of the relevant principles in the 1988 
  judgment. In the light of that I believe that my meaning was 
  clear. The absurdity of the plaintiff company’s first contention, 
  which was wisely abandoned at the hearing of this case, that it 
15  was entitled to foist itself on the Government and CAL by 
  stepping in as the contracting party in place of Cohen Associates, 
  reinforces that belief. 
      The declaration made by this court in paras. 1(b) and 2(a) of 
  the order approved by the court on December 8th, 1988 and 
20  based on the 1988 judgment is a declaration that the first and 
  second defendants are constructive trustees of the plaintiff in 
  respect of the fees, remuneration and other profits which they 
  have made and will make from the contracts made by Cohen 
  Associates with the Government and CAL. To adopt the imagery 
25  of Megarry, V.-C, the defendants are trustees of the fruit. The 
  plaintiff is not entitled to take an axe to the tree. That, in the light 
  of the principles established in the line of cases which I 
  considered in the 1988 judgment, was not only the intent but also, 
  in my view, the clear meaning of the declarations. 
30      I now have to formulate a specific declaration based on this 
  conclusion at which I have arrived. It is as follows: 
          That the declarations made by this Honourable Court 
      (“the court”) in paras. 1(b) and 2(a) of the order approved 
      by the court on December 8th, 1988 and filed by the Clerk of 
35      the Court in the Order Book (“the 1988 order”) based on the 
      judgment of the court given and pronounced on November 
      24th, 1988 in a suit moved before the court between the 
      plaintiff herein and the first and second defendants herein 
      mean that the first and second defendants are constructive 
40      trustees for the benefit of the plaintiff of all contracts to 
      provide public relations and sales promotion services made 

1988–89 CILR 484

      between them or any one of them and the Cayman Islands 
      Government and Cayman Airways Ltd. only for the purposes 
      of the orders made in paras. 1(c), 1(d), 1(e), 2(b), 2(c), and 
      2(d) of the 1988 order. 
I decline to make a declaration in accordance with para. 2 of the 
  originating summons. That paragraph relates to an alleged trust 
  relationship which I have found not to exist. 
      It was submitted on behalf of the plaintiff that I should make a 
  declaration as to whether the trust in this case is a substantive 
10  institution or merely a remedy. For the reasons which I have 
  given, I regard that question as irrelevant to the determination of 
  this matter and I decline to make such a declaration. 
      The injunctions sought in para. 4 of the summons are refused. 
  That outcome is consequential upon the declaration which I have 
15  made as to the meaning of the order. 
      I was invited to give directions as to the further conduct of the 
  accounting. That is indeed desirable, but is, I think a matter more 
  appropriately dealt with when I produce my conclusion in the 
  accounting proceedings arising from the 1988 judgment. I will 
20  make the order as to costs on hearing any submissions which 
  counsel may wish to make. 
  Judgment for the defendants. 
  Attorneys: Charles Adams & Co. for the plaintiff; Truman Bodden & 
  Co. for the defendants.