SCTSPRINT3

COMMONWEALTH OIL & GAS COMPANY LIMITED v. NICHOLAS WILSON BAXTER+EURASIA ENERGY LIMITED


FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Nimmo Smith

Lady Paton

[2009] CSIH 75

CA5/07

OPINION OF THE LORD PRESIDENT

in Reclaiming Motion

in the cause

COMMONWEALTH OIL & GAS COMPANY LIMITED

Pursuer, Respondent and

Cross-Appellant;

against

(1) NICHOLAS WILSON BAXTER

First Defender and Reclaimer;

and

(2) EURASIA ENERGY LIMITED

Second Defender and Cross-Respondent:

_______

Act: Dean of Faculty (Keen, Q.C.), Munro; Brodies, LLP

Alt: Currie, Q.C., Lindsay; McGrigors, LLP

2 October 2009

[1] I am obliged to Lord Nimmo Smith for his summary of the essential facts in this complex case and for his narrative of counsel's submissions.

The first issue
[2] In Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq. 461 the House of Lords had to determine whether a contract between a partnership and a railway company, entered into for the manufacture and supply of certain iron chairs to support the permanent way of the railway, was valid. Mr Thomas Blaikie was at the time of the contract both the managing partner of the partnership and a director and chairman of the company. The argument for the company was that Mr Blaikie was, by reason of the corporate offices which he held, a trustee for the company (or in any event was subject to the same obligations as those which affected a trustee in relation to a beneficiary) and as such could not, in relation to the affairs of the company, make any contract for his own benefit or for the benefit of the firm of which he was a partner. Their Lordships, reversing the Court of Session ((1851) 14 D. 66), sustained that argument. Although the issue in the case was concerned with the validity of a contract between two parties in each of which Mr Blaikie had an interest, the Lord Chancellor (Lord Cranworth) expressed the relevant principle more widely. At page 471 he said:

"A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."

At page 473 he added:

"It was Mr Blaikie's duty to give to his co-Directors, and through them to the Company, the full benefit of all the knowledge and skill which he could bring to bear on the subject. He was bound to assist them in getting the articles contracted for at the cheapest possible rate. As far as related to the advice he should give them, he put his interest in conflict with his duty, and whether he was the sole Director or only one of them, can make no difference in principle."

Reliance was placed on The York Buildings Co v Mackenzie (1795) 3 Pat. App. 378, where the "common agent" for the insolvent company purchased at auction on his own behalf a portion of the estates he had been administering; the sale was set aside. Lord Cranworth also cited a passage from the Digest (18.1.34.7) to the effect that persons in a fiduciary capacity can not transact with themselves as individuals. A number of English authorities, including Keech v Sandford (1726) Select Cas. temp. King 61, were cited. Lord Brougham concurred, observing (at page 477), that there was no difference in this matter between Scots and English law.

[3] The principle that a fiduciary cannot be allowed to enter into engagements in which he has or can have a personal conflicting or possibly conflicting interest has been consistently applied in many situations since - see, for example, Boardman v Phipps [1967] A.C. 46, per Lord Hodson at page 106 and per Lord Upjohn at page 124. At the latter page Lord Upjohn, who while dissenting on the facts did not differ on the law, explained Lord Cranworth's statement as follows:

"The phrase 'possibly may conflict' requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of a particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in conflict."

In other words real, not fanciful, possibilities were in contemplation. In Bray v Ford [1896] A.C. 44, Lord Herschell described the principle (at page 51) as "an inflexible rule of a Court of Equity". While Scotland does not have, and never has had, a court of equity distinct from a common law court, Scots law has long recognised the nature and incidents of a fiduciary relationship. In Huntington Copper Co v Henderson (1877) 4 R. 294, the Lord Ordinary (Lord Young), whose decision and reasoning was affirmed by the First Division, at page 299 expressed essentially the same principle. He said:

"[The] principle is that a person who is charged with the duty of attending to the interest of another shall not bring his own interest into competition with his duty."

Lord Herschell in Bray offered the following rationale for the rule:

"I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect."

[4] The general principle is thus clearly established. What in this case, as in others, becomes important is the application of that principle to the relevant circumstances. First, however, note must be taken of London and Mashonaland Exploration Company Limited v New Mashonaland Exploration Company Limited [1891] W.N. 165. There Chitty J refused an interlocutory application to restrain an individual, alleged to have been duly elected chairman and director of the plaintiff company, from acting as a director of the defendant company. The two companies were apparently rivals. The case is very briefly reported. The decision appears to have turned on the absence of any prohibition in the plaintiff company's articles or on any contractual arrangement, as well as on the fact that it was not suggested that the individual was about to disclose any confidential information. It is not clear what, if any, authority was cited. The decision subsequently had the apparent approval of Lord Blanesburgh in Bell v Lever Brothers [1932] A.C. 161 at page 195. But it should be noted that Lord Blanesburgh was in that passage discussing "contracts of the second class", that is those in which the company had no interest (see page 194). His Lordship refers to "Lord Cranworth's locus classicus" in Aberdeen Railway Co v Blaikie Bros but observed that that quotation "is not addressed to a director's own contract with outsiders in which the company has no financial interest at all" (emphasis added). Lord Blanesburgh, who alone of their Lordships refers to Mashonaland, does not appear to have been addressing the situation where a conflict exists, or may possibly come to exist, between the duties of a director to his company and his own personal interests. The other members of the House, while concurring in the result, do not appear to have endorsed Mashonaland.

[5] The decision in Mashonaland has given rise to some academic and judicial unease (see, in particular, the discussion by Sedley LJ in In Plus Group Limited v Pyke [2002] 2 BCLC 201 at paras.[79]-[88]). Sedley LJ, despite his unease about Mashonaland, took the view that the Court of Appeal was bound by it. However that may be, this court is not so bound. While recognising that there are good reasons why in this field the laws of Scotland and of England should be the same, I would not regard Mashonaland otherwise than as a decision on its own facts and therefore of limited value on any matter of principle. In Meyer v Scottish Co-operative Wholesale Society 1958 S.C. (H.L.) 40 Lord Denning at page 68 clearly doubted whether in modern circumstances a director of one company was at liberty to become a director also of a rival company.

[6] The first defender and reclaimer ("Mr Baxter") became a director of the pursuer ("COGCL") in April 2004. He held that office until he resigned in February 2006. He became a director of the second defender ("Eurasia") in March 2005. By that time he had been alerted by his former colleague, Mr Khait, to the possibility that an area below shallow waters in the Caspian Sea might be developed commercially for the recovery of oil and gas. Mr Baxter pursued that opportunity. On 28 November 2005 he was appointed president and chief executive officer of Eurasia (at that time styled Pacific Alliance Ventures Limited). On the same date the directors of the company approved a change of its name to Eurasia Energy Limited; the change was to take effect from 12 January 2006. On 21 December 2005 Eurasia filed an information statement with the United States Securities and Exchange Commission. It disclosed that Mr Baxter held 3 million (4.95%) of its shareholding. It was a public company which had previously concentrated its business on marketing and advertising. The information revealed that "[through] the second half of 2005, management has considered other potential opportunities for our company including opportunities in businesses which have no connection to marketing and advertising. In particular, our director, Mr Nicholas W Baxter, has been proactive in pursuing an opportunity in the oil and gas industry based on his previous experience and contacts in that industry." On 5 December 2005 Mr Baxter signed on Eurasia's behalf the Memorandum of Understanding with SOCAR which gave to Eurasia exclusive negotiating rights with respect to this commercial opportunity ("the Eurasia block opportunity").

[7] Mr Baxter clearly had a personal interest in that opportunity. His shareholding and offices in Eurasia make that plain. The Lord Ordinary has found that, although COGCL had hitherto been pursuing onshore oil and gas ventures, it would have been interested in the Eurasia block opportunity as that opportunity had come to be developed by late November/early December 2005. The Lord Ordinary has found that in these circumstances there was, with respect to that opportunity, a conflict of interest between Mr Baxter and COGCL.

[8] At all material times Mr Baxter was a director of COGCL. The issue in this reclaiming motion is whether, as regards the Eurasia block opportunity, there was a conflict between Mr Baxter's personal interest in that opportunity and his duty to COGCL such that his act in signing the Memorandum of Understanding on Eurasia's behalf constituted a breach of his fiduciary obligations to COGCL.

[9] It is now accepted on behalf of Mr Baxter that, as a director of COGCL, he owed to it certain fiduciary duties. The facts that he had no executive functions and that he received no emoluments from this directorship do not serve to negative the existence of fiduciary duties. The question to be resolved, as I see it, is the scope or extent of these duties.

[10] The Dean of Faculty on behalf of COGCL placed much reliance on the observation by Sedley LJ in In Plus Group Limited v Pyke that the fiduciary duty of a director was "uniform and universal" (para.[80]). That may be true at a certain level of generality but, as Pyke illustrates and as the Dean accepted, there may be no breach of obligation where the director is excluded from taking any part in the affairs of the company. Put otherwise, the duty to avoid conflict may not extend to circumstances where a director is so excluded. As Brooke LJ (with whom Jonathan Parker LJ agreed) put it at para.[75], "the facts and circumstances of each case must be carefully examined to see whether a fiduciary relationship exists in relation to the matter of which complaint is made". This reflected the analysis favoured by Lord Upjohn in Boardman v Phipps at page 107. As Rix LJ put it in Foster Bryant Surveying Limited v Bryant [2007] 2 BCLC 239 at para.[65] (a case where the director had intimated his resignation but it had not yet taken effect), "... although [the] general principle is not in doubt, the extent of a director's duty in particular situations may depend on the circumstances". In the same way, if a director were to draw to the attention of his company a particular commercial opportunity, whether in an embryonic or developed state, and to obtain the company's consent to pursue that opportunity on his own personal behalf, his duty to avoid a possible conflict of interest would not extend to that opportunity. Similarly, it seems to me that if, without the identification of any particular opportunity, the company, expressly or implicitly, were to give its prior consent to a director pursuing possibly competing interests, his duty would not extend to avoiding such conflicts. If, for example, in the present case agreement had been reached between Mr Baxter and COGCL that some opportunities (say, any onshore) would be brought to COGCL but that others (say, offshore) could be exploited by Mr Baxter for his own interest and benefit, the scope of Mr Baxter's duties would have been modified by that arrangement. Even without express agreement, the actings of parties could in some circumstances have given rise to a modification of Mr Baxter's duties. However, the reclaimer did not argue that what might otherwise have been his fiduciary duties had in fact been modified by the actings of the parties. Accordingly, I need say nothing further about this possible approach.

[11] The contention for Mr Baxter was based on the general proposition that the duty of a director to avoid conflicting interests extended only to commercial opportunities which came to his attention in the exercise of his function as director of the company in question or which, as such director, he was "tasked" to pursue. Put otherwise, his duty to avoid conflicting interests did not extend beyond these two classes of situation. I agree with Lord Nimmo Smith's reasons for rejecting that contention. I add a few observations of my own.

[12] In reviewing the authorities much emphasis was placed by counsel for Mr Baxter on the importance which the judges recognised of the particular circumstances of the cases before them. I agree that it is important in every case to have regard to the particular circumstances. But it does not follow that the scope of the duty extends only to circumstances in which it has been recognised in these authorities. For example, in Industrial Development Consultants Limited v Cooley [1972] 1 W.L.R. 443 the director in question was the managing director who additionally had been engaged specifically to procure new business for the company in the public sector. It does not follow that, had he been a non-executive director without special "tasking" to procure such business, similar fiduciary duties would not by reason of that office have been imposed on him.

[13] I have earlier quoted two passages from Lord Cranworth's speech in Aberdeen Railway Co v Blaikie Bros. The inference from these passages is that Mr Blaikie, as a director, had a duty to protect the interests of the railway company and that, by being party to a transaction in which it and the partnership had conflicting interests (in relation to the purchase price of the chairs), he was in breach of his fiduciary duty to the company. Likewise, in the present case there were, as the Lord Ordinary found, conflicting interests or at least potentially conflicting interests between COGCL and Eurasia in relation to the Eurasia block opportunity. For the purposes of this issue it does not matter that, as at the date of the signing of the Memorandum of Understanding, COGCL was ignorant of the existence of this opportunity. Although Mr Baxter's duty was proscriptive rather prescriptive - he had no obligation to bring that opportunity to the pursuers - his duty barred him from taking the positive step of securing it for a potential rival. In these circumstances Mr Baxter's act in signing the Memorandum of Understanding on behalf of Eurasia constituted, in my view, a breach by him of his fiduciary duty to COGCL.

[14] In reaching this conclusion I have proceeded on the basis of the proposition supported by both parties before us that Mr Baxter's fiduciary duty as director was proscriptive and not prescriptive. The Lord Ordinary relied upon the analysis of a director's duties made by Arden LJ in Item Software (UK) Limited v Fassihi [2004] BCC 994 to the effect that a director had a positive "duty to disclose ... information of relevance and concern" to the company. As neither party before us sought to rely on Arden LJ's analysis or to support the Lord Ordinary's reasoning in so far as based on that analysis, it is unnecessary to say anything further about it. On this matter I reserve my opinion. An observation along the same lines was made by Jonathan Parker LJ in Bhullar v Bhullar [2003] 2 B.C.L.C. 241 at para.[41] where he spoke of the existence of the opportunity being "information which it was relevant for the company to know, and it follows that the appellants were under a duty to communicate it to the company". While I agree with the result in Bhullar (there was a clear potential conflict between the appellant's private interests in acquiring the neighbouring property and the company's interest in the same), I am not to be taken as agreeing with the reasoning of the Court of Appeal.

[15] For these reasons the reclaiming motion must, in my view, be refused.

The second issue
[16] I agree with Lord Nimmo Smith that for the reasons given by him the cross-appeal must fail because there was no knowing receipt by Eurasia of any asset of GOGCL. Authority in Scotland on the requisites of liability for knowing receipt is sparse. It is, however, clear that its foundation lies in the law of trusts, under which a stranger to a trust may in certain circumstances become liable to the trustees (or the beneficiaries) in respect of trust property. Menzies on Trustees (2nd ed.) at para.1271 in a section headed "Following Trust Estate" identifies the second situation where a constructive trust may arise as "... where funds affected with a trust come into the hands of another than the beneficiary, either gratuitously or with knowledge of a breach of trust, the transferee is a constructive trustee". The cited passage imports that prior to their coming into the hands of a stranger there are funds affected with the trust, that is, trust property. It has been recognised in Scotland that remedies based on the misapplication of funds may be afforded where a fiduciary relationship arises commercially. In Style Financial Services Limited v Bank of Scotland 1996 S.L.T. 421 the court observed at page 426J-K:

"If the defenders were aware of the existence of this fiduciary relationship and that the funds paid into Goldberg's account were the pursuers' funds, then we are satisfied that sufficient has been averred to entitle the pursuers to seek to make out a case based on recompense."

Again the passage describes pre-existing funds - in that case monies collected from debtors.

[17] In England, where the law on knowing receipt is more developed, the classic statement of its requisites is that of Hoffmann L.J. (as he then was) in El Ajou v Dollar Land Holdings plc [1994] 2 All E.R. 685 at page 700 where he said:

"This is a claim to enforce a constructive trust on the basis of knowing receipt. For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable through a breach of fiduciary duty."

That statement appears to me to be consistent with Scots law. Again the passage proceeds upon the basis that there are assets [of the plaintiff], that they are disposed of and that they are, with certain knowledge, beneficially received by the defendant. The assets in that case comprised a large sum of money. The cited passage from El Ajou was endorsed by Nourse L.J. in BCCI (Overseas) Limited v Akindele [2001] Ch. 437 at page 448 (the pre-existing funds again being a sum of money). At page 450, in introducing a passage on knowledge, Nourse L.J. speaks of "misapplied assets of companies" and "assets received ... traceable to a breach of trust". There is no support there for the view that liability in knowing receipt may arise when assets are created, as distinct from transferred, in breach of trust.

[18] Counsel for COGCL urged us not to be "too mechanistic". Junior counsel cited passages from the judgment of Lawrence Collins J. (as he then was) in CMS Dolphin Limited v Simonet [2001] 2 BCLC 704, especially at paragraphs [98] - [104]. There his Lordship was discussing the extent of the liability of the fiduciary (Mr Simonet) for the profits made by the company (Blue G.B. Limited) to which the diversion had been made. The company itself was hopelessly insolvent and accordingly no question of any remedy against it arose in the litigation. At paragraph [96] Lawrence Collins J. said:

"In my judgment the underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation he is appropriating for himself that property. He is just as accountable as a trustee who retires without properly accounting for trust property. In the case of the director he becomes a constructive trustee of the fruits of his abuse of the company's property, which he has acquired in circumstances where he knowingly had a conflict of interest, and exploited it by resigning from the company."

For that purpose it may well be appropriate to treat a "maturing business opportunity ... as if it were property of the company" - though it is not irrelevant to notice that in that case the diversion was essentially of existing contracts of the plaintiff and accordingly of the opportunity to exploit these items of property. The case is not authority for the proposition that, in a question with a stranger to the fiduciary relationship, a pre-existing proprietary interest in the claimant can be dispensed with.

[19] In its pleadings COGCL seeks to found on "a valuable commercial opportunity ... to enter into the [Memorandum of Understanding]" (Cond. 5.5) and its seventh plea-in-law maintains that it suffered loss, injury and damage "by reason of [Eurasia's] knowing receipt of a commercial opportunity brought to it in breach of [Mr Baxter's] fiduciary duties". The commercial opportunity to enter the Memorandum of Understanding not, in my view, being in any relevant sense property, cannot found a basis for a remedy against Eurasia in knowing receipt. In oral argument the focus was on the Memorandum of Understanding itself. That, conferring as it did rights, was of course an item of property. It was submitted that, on the Memorandum coming into existence, it was "fixed with a trust in favour of COGCL". But the Memorandum was not, so far as appears, derived from or the embodiment of any prior rights in which COGCL had an interest. The fact that it came into existence by reason of Mr Baxter's breach of his fiduciary obligations to COGCL did not, in my view, fix it with a trust in the latter's favour. Quite different considerations would, of course, apply had a case been made that Eurasia gave knowing assistance in Mr Baxter's breach of duty.

[20] I would add only that knowing receipt appears to me to be, primarily at least, a restitutionary remedy. While no doubt a claim for damages might in certain circumstances lie against a recipient if with the requisite knowledge he disposed of or dissipated the property in question, it is not immediately obvious that a claim in damages is open by reason of the receipt itself. It is, however, unnecessary to reach any concluded view on that point.

[21] Nor is it necessary in the circumstances to reach any definite conclusion about whether Mr Baxter's state of mind when he executed the Memorandum of Understanding on behalf of Eurasia is to be attributed to the latter. The Lord Ordinary, albeit in the context of knowing assistance, noticed this topic and made certain observations on it (paragraphs [201] - [205]). We heard submissions on it in the context of knowing receipt. The contention that Mr Baxter was, for the purposes of the execution of the Memorandum of Understanding, the "directing mind and will" of Eurasia was renewed. It was noted that Mr Baxter was not only a director of Eurasia but also its Chief Executive Officer (appointed to that office on the understanding that he would bring a relevant project to it) and was its President - though the powers of that office holder were not established in evidence. The Memorandum of Understanding, it was said, would not have come Eurasia's way other than through Mr Baxter, whose home in Aberdeenshire, it was claimed, was the principal or a principal place of business of Eurasia. The Dean of Faculty relied upon certain observations made by Lord Hoffmann, delivering the judgment of the Privy Council, in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C. 500 and submitted that it was obvious that in signing the Memorandum Mr Baxter was the directing mind of Eurasia. But, as is plain from Lord Hoffmann's observations at page 511, their Lordships wished to guard themselves against being understood to mean that whenever a servant of a company has authority to do an act on its behalf, knowledge of that act will for all purposes be attributed to the company. Much will depend upon circumstances, including, where it arises, any question of statutory construction of relevant legislation. Here no question of statutory construction arises, rather a more general question about attribution of knowledge. Eurasia is a body incorporated in the State of Nevada (Article 1 and Answer 1). It appears to be a public company with numerous shareholders and with other officers besides Mr Baxter (Lord Ordinary, paragraph [205]). No evidence was led about the articles of association or other constitutional documents of Eurasia; nor as to the nature and extent of Mr Baxter's authority in relation to the pursuit of the Memorandum on Eurasia's behalf; nor as to when or by whom the relevant decisions were taken (Lord Ordinary, paragraph [204]). In the absence of an appropriate factual foundation, I agree with the Lord Ordinary's observations on the matter of attribution.

[22] I find it unnecessary to express any view on whether, if Mr Baxter's knowledge is to be attributed to Eurasia, that knowledge was sufficient for the purpose - in particular, whether or not it required an awareness that Mr Baxter was acting in breach of his fiduciary duties.

[23] For these reasons as well as for the reasons given by Lord Nimmo Smith the cross-appeal must, in my view, be refused.

[24] I agree with Lord Nimmo Smith that the case should now be remitted to the Lord Ordinary to proceed as accords.


FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Nimmo Smith

Lady Paton

[2009] CSIH 75

CA5/07

OPINION OF

LORD NIMMO SMITH

in Reclaiming Motion

in the cause

COMMONWEALTH OIL & GAS COMPANY LIMITED

Pursuer, Respondent and

Cross-Appellant;

against

(1) NICHOLAS WILSON BAXTER

First Defender and Reclaimer;

and

(2) EURASIA ENERGY LTD

Second Defender and Cross-Respondent:

_______

Act: Dean of Faculty (Keen, Q.C.), Munro; Brodies, LLP

Alt: Currie, Q.C., Lindsay; McGrigors, LLP

2 October 2009

Introduction

[25] On 7 December 2005 the second defender ("Eurasia") and the State Oil Company of the Azerbaijan Republic ("SOCAR") entered into an agreement, described as a Memorandum of Understanding, under which Eurasia was granted an exclusive right, for a period of twelve months, to negotiate with SOCAR on the terms of a possible further agreement relating to the exploration and development of an oil exploration block in Azerbaijan ("the Eurasia block"). In the event, the Memorandum of Understanding expired without any further agreement being concluded. In its pleadings, the pursuer ("COGCL") maintains that the conclusion of the Memorandum of Understanding was the result of the diversion by the first defender ("Mr Baxter") to Eurasia of a valuable commercial opportunity. It contends that, in identifying and procuring that opportunity, and in failing to bring it to COGCL, Mr Baxter acted in breach of a fiduciary duty owed by him as a director of COGCL. It further contends that, since Mr Baxter was a substantial shareholder in Eurasia, one of its directors, its president and its executive officer, Eurasia knew that Mr Baxter had secured the Memorandum of Understanding on its behalf in breach of his fiduciary duties to COGCL.

[26] In the summons, COGCL seeks in the first place an account of the profits accruing to Mr Baxter personally by reason of his breach of fiduciary duty. It further seeks a declarator that Eurasia held the Memorandum of Understanding and any profits flowing from it on constructive trust for COGCL, together with an account of those profits. At the conclusion of the proof before the Lord Ordinary, however, counsel for COGCL stated that those conclusions were no longer insisted in, since it was accepted that no profits had in fact been derived from the Memorandum of Understanding. COGCL continued however to insist in its alternative conclusion for damages against Mr Baxter and Eurasia jointly and severally, on the basis that, if Mr Baxter had brought the opportunity to enter into the Memorandum of Understanding to the attention of COGCL, it would have pursued that opportunity and entered into the Memorandum of Understanding, either on its own account or through the medium of a corporate vehicle incorporated for that purpose. Had COGCL entered into the Memorandum of Understanding, it was maintained, there was a substantial chance that it would have successfully negotiated and entered into a further agreement for the exploration and development of the Eurasia block. In those circumstances, it was argued, a liability in damages existed by reason of Mr Baxter's breach of fiduciary duty and Eurasia's knowing receipt of a commercial opportunity brought to it in breach of Mr Baxter's fiduciary duty.

[27] After hearing evidence, principally from Mr Baxter and from Mr Alastair McBain, who held, among other offices, that of a director of COGCL, the Lord Ordinary, for the reasons given in his opinion dated 14 December 2007, [2007] CSOH 198, concluded that Mr Baxter acted in breach of his fiduciary duty to COGCL when he pursued the Eurasia block opportunity for his own benefit, or latterly for the benefit of Eurasia, without having first disclosed the existence of that opportunity to COGCL and obtained its permission ("the first issue"). He also concluded that Eurasia did not knowingly or dishonestly participate in that breach of duty, and was therefore not under any liability to compensate COGCL for any loss which it might have suffered in consequence ("the second issue"). He put the case out for a hearing to discuss the appropriate form of order, and future procedure, in the light of these conclusions.

[28] In this reclaiming motion, Mr Baxter appeals against the Lord Ordinary's finding in favour of COGCL against him on the first issue. In a cross-appeal, COGCL appeals against the Lord Ordinary's finding in favour of Eurasia against it on the second issue (as now reformulated).

The factual circumstances

[29] It is noteworthy that before us on both sides of the Bar no issue was taken with the Lord Ordinary's careful assessment of the witnesses and their evidence, or above all, with any of his detailed findings in fact. What follows is no more than an abbreviated account of the Lord Ordinary's most important findings in fact. For a full account, the reader is referred to the Lord Ordinary's opinion.

[30] In about 1993, following the break-up of the former USSR, Mr Baxter, who had trained as a geophysicist and had worked on mineral exploration projects around the world, was among the first western entrepreneurs to become involved in exploration activities in the Azerbaijan Republic. In October 1995 he and a colleague, Jeremy Little, formed COGCL as a company incorporated in Anguilla. It was a wholly-owned subsidiary of A & B Geoscience Corporation ("ABG"). ABG initially sold geophysical equipment, but soon became involved in oil and gas exploration. It subsequently changed its name to Arawak Energy Corporation ("Arawak"), as explained below. It was (and remains) a public company listed on the Toronto Venture Exchange. Mr Baxter and Mr Little had previously formed Addison & Baxter Ltd ("ABL"), which also became a subsidiary of ABG. COGCL was intended to be a holding company which would have subsidiaries operating in the Commonwealth of Independent States, formed from states formerly belonging to the USSR. Its original directors included Mr Baxter, Mr Little and Mr Mikhail Khait, a Russian geophysicist involved with Mr Baxter in exploration activities in Azerbaijan. Mr Baxter was employed by COGCL as its chief operating officer, and Mr Little was employed as its president and chief executive officer.

[31] Reference was made during the course of the evidence to COGCL's Articles of Incorporation and By-Law, but they were not examined in any detail. The Lord Ordinary states that both documents bore to be made under Anguilla's Companies Ordinance, 1994. The Articles appeared to be analogous to the memorandum of a UK company, specifying such matters as the company's name, registered office, authorised share capital and purposes. The By-Law appeared to be analogous to the articles of association of a UK company. It provided inter alia that the business and affairs of the company should be managed by the directors, that any director could convene a meeting of the directors at any time and that the directors should appoint a managing director and other officers of the company. It also provided for the directors to designate by resolution the persons authorised to sign cheques. No evidence was led concerning the law of Anguilla which, being a matter of fact for this court, must therefore be deemed to be the same as that of Scotland.

[32] In July 1997 Mr Baxter and Mr Little formed Commonwealth Gobustan Ltd ("CGL") as a wholly-owned subsidiary of COGCL, incorporated in Anguilla. CGL was formed as a special vehicle to act as a "contractor party" to the proposed South-West Gobustan exploration, development and production sharing agreement ("EDPSA") with Azerbaijan. Mr Baxter and Mr Little became directors of CGL, and were also employed in the management of the company. In 2001 ABG became involved in discussions with Mr McBain, a consultant with Vitol Services Ltd, a member of the Vitol group. This was a privately owned group of companies, primarily concerned in oil trading. The discussions resulted in an agreement being reached, which involved the provision of finance to ABG, COGCL and CGL. Difficulties arose; among other events, Mr Khait's employment was terminated and, at a meeting of the board of directors of ABG on 10 September 2002, Mr Baxter and Mr Little resigned from their executive positions with ABG, as respectively the chief operating officer and the president and chief executive officer. Mr McBain was then appointed as president and chief executive officer of ABG. He was also appointed as the representative director of ABG with authority to vote the shares of COGCL on all matters requiring the approval of COGCL's shareholders. It was also agreed at the meeting that Mr Baxter and Mr Little should each receive what was described as an "executive termination package", consisting of a termination agreement and a consultancy agreement.

[33] There took place simultaneously with the ABG board meeting a meeting of the shareholders of COGCL. On the evidence, this was the only shareholders' meeting of COGCL to take place. The minute recorded that Mr McBain was present, representing the sole shareholder, ABG. He and four others were appointed as the directors of COGCL. The terms of the termination and consultancy agreements were then negotiated. One matter raised by Mr Baxter and Mr Little concerned business asset taper relief in respect of the capital gains tax liability which they would incur in the event of a disposal of their shareholdings in ABG. This matter was reflected in the provisions of both the termination agreement and the consultancy agreement ("the first consultancy agreement"). The latter agreement was entered into between ABG and Mr Baxter on 13 December 2002 with effect for the period from 11 September 2002 to 10 September 2003. It included a "non-compete" clause, which was effective for the duration of the agreement.

[34] In June 2003 ABG changed its name to Arawak Energy Corporation ("Arawak"). At that time Mr McBain and Mr Baxter continued to be directors of CGL. Although Mr Baxter was never appointed by COGCL as a director of CGL, he effectively held office as a director of CGL at the pleasure of COGCL. The reality appears to be that little attention was paid to separate corporate identities. It is a matter of admission in the pleadings that Arawak and COGCL were involved in pursuing efforts to identify new business opportunities in Azerbaijan in relation to the Siyazan monocline and the Neftchala oilfield (discussed below). The Lord Ordinary accepted Mr Baxter's evidence that he had not been asked at that time to look for new business opportunities in Azerbaijan.

[35] By September 2003, relations between Mr Baxter and Mr McBain were reasonably cordial. The first consultancy agreement was about to expire. Mr Baxter had not been asked to do anything under it. It had become apparent to Mr Baxter and Mr Little that ABL, which had ceased to be active, was likely at some point to be wound up unless, as Mr Little was suggesting, he and Mr Baxter were to take the company over. If, however, ABL was either wound up or ceased to form part of the Arawak group, the consequence would be that Mr Baxter would lose his sole remaining directorship of a company in the Arawak group. As a result he would cease to qualify for taper relief on the sale of his Arawak shares, which had risen in value by millions of dollars. His potential tax liability amounted to hundreds of thousands of pounds. Provided, however, that Mr Baxter could secure a directorship or employment with another company in the Arawak group, it could be in his interests to cease to be a director of ABL, which was the principal company of his (and Mr Little's) pension scheme. Under the terms of the scheme, it was possible for them to take early retirement at the age of 50 (i.e. in Mr Baxter's case in February 2004), to receive a tax free lump sum from the scheme, and for the scheme then to be wound up. This was only possible if they ceased to be directors of ABL.

[36] At the end of September and during October 2003, the first consultancy agreement having expired, Mr Baxter negotiated with Mr McBain the terms of a revised agreement, at a reduced annual payment and without the "non-compete" clause. By this time, Mr Baxter's expertise and experience were effectively confined to the oil and gas business in Azerbaijan. His intention was to find new areas of activity in the oil and gas sector in Azerbaijan. The Lord Ordinary accepted Mr Baxter's evidence that it must have been clear to Mr McBain at this time, whether or not he was told so in terms, that Mr Baxter wished to pursue oil and gas projects in Azerbaijan on his own behalf. Since Mr Baxter's experience and contacts lay in the oil and gas sector in Azerbaijan, his most obvious course of action, if released from a non-compete restriction, was to pursue oil and gas projects there on his own behalf.

[37] On 20 October 2003 a company named Pacific Alliance Ventures Ltd ("PAVL") was incorporated in Nevada. One of its directors was Mr Gerald Tuskey, who had acted as a legal adviser to ABG until Vitol took control of their management in September 2002. He was a friend of Mr Baxter. The other director was Ms Velda King. It appears that the company was formed by Mr Tuskey with contacts in Vancouver, and that he invited his friends, including Mr Baxter, to invest in it. It appears to have had 58 shareholders at that time. Mr Baxter was the largest shareholder, with about 15 per cent of the share capital. The company carried on business in marketing and advertising.

[38] On 19 November 2003 the second consultancy agreement was executed. It was entered into between Arawak and Mr Baxter, and was effective for the period from 11 September 2003 to 10 September 2004. It contained no "non-compete" provisions. Once the agreement had been signed, Mr Baxter saw no obstacle to his seeking out new oil and gas opportunities in Azerbaijan on behalf of a third party or on his own account. The Lord Ordinary held that, given that Mr McBain understood that Mr Baxter wished the non-compete clause removed so as to be able to act on his own account, he probably thought at the time that Mr Baxter was now free to act on his own account.

[39] In February 2004 Mr Baxter became aware of COGCL's interest in a potential project at Siyazan, in the north of Azerbaijan. The Siyazan monocline was a geological structure running from the coast of the Caspian Sea in a north-westerly direction along the edge of the Greater Caucasus mountain range for a distance of about 90km. There was an existing oilfield there, although part of the area remained undeveloped. The potential opportunity at Siyazan had been (and continued to be) investigated without Mr Baxter's involvement. He did not understand himself at that time to have any role in Azerbaijan in relation to finding new projects for the Arawak group.

[40] By March 2004 Mr Baxter and Mr Little had decided to resign as directors of ABL and wind up the pension scheme, provided they could secure their position in relation to business asset taper relief. On 9 March 2004 Mr Baxter had a meeting with Mr McBain. Following the meeting, Mr Baxter sent Mr McBain, on 11 March 2004, what he described as a "brief minute of a few of the points we agreed on Tuesday, with some of my comments". The first point was:

"1. N.B. [Mr Baxter] to be appointed as a director of COGCL. Best done asap, but could wait until the next AGM (presumably May/June 2004)."

The Lord Ordinary considered in great detail the evidence of Mr Baxter and Mr McBain about their recollections of the meeting and their understanding of their own and each other's motivations. He found it difficult to accept that Mr Baxter's appointment arose out of an intention that he should, as a director of COGCL, have a responsibility for finding new projects for COGCL (or Arawak) in Azerbaijan or elsewhere. He concluded that it was likely that Mr McBain understood that Mr Baxter's proposal that he should become a director of COGCL was motivated by tax considerations. At the same time, he accepted Mr McBain's evidence that his reason for agreeing to have Mr Baxter appointed as a director of COGCL was not motivated, primarily at least, by a desire to accommodate Mr Baxter's desire to avoid capital gains tax. To appoint him as a director of a holding company whose board never met may have been, as Mr McBain said, a gesture of trust.

[41] In April 2004 a project review of the Siyazan monocline was completed for the Arawak group. Mr Baxter was not involved in its preparation. The report identified the north-western end of the monocline (the end furthest from the coast) as the area of greatest interest. It was noted, however, that the south-east end of the monocline might extend beyond the coastline. In that regard, the report stated:

"This is a shallow offshore area (water depth less than 10m), should reserves be located in this area development would be reasonably simple".

The report recommended that negotiations should be undertaken to purchase additional data from SOCAR with a view to negotiating a memorandum of agreement with SOCAR. It was recommended that the deal with SOCAR should, if possible, relate to the north-western section of the monocline: it was not suggested that it should include offshore areas. The Lord Ordinary accepted Mr Baxter's evidence that he had not by this time been given responsibility for finding new business opportunities in Azerbaijan on behalf of COGCL.

[42] On 13 April 2004 a meeting of the Arawak board of directors took place. One of the items on the agenda was:

"4. Discuss and if appropriate appoint Nicholas W Baxter as director of Commonwealth Oil & Gas Company Ltd".

The appointment of directors to COGCL was a matter to be decided by the shareholders of COGCL - in other words, Arawak, whose delegate was Mr McBain - at a shareholders' meeting. It is however a matter of agreement between the parties that, on that date,

"Arawak directors' meeting appoints Mr Baxter and Mr Little to the COGCL Board".

[43] At the time Mr Baxter became a director of COGCL he was not given any specific management or executive functions, and it was not suggested to him then, or at any subsequent time prior to the signing of the Memorandum of Understanding, that he had any responsibility for finding new business opportunities in Azerbaijan. He did not receive any remuneration attributable to his directorship of COGCL, but continued to receive directors' fees from CGL. He attended no board meetings of COGCL, since no board meetings were held. On about 8 June 2004 the appointment of Mr Baxter and Mr Little as directors of COGCL was registered with the Registrar of Companies in Anguilla. On 9 June they resigned as directors of ABL.

[44] On 27 July 2004 Mr Baxter was made aware that negotiations with SOCAR relating to the Siyazan project had been unsuccessful, and that a decision had been taken on behalf of COGCL to reinitiate a review of the Neftchala area as a potential new project. Neftchala was an area in southern Azerbaijan where there was an existing oilfield. Mr Baxter had not been involved in Siyazan; and, even after the lack of success in respect of the Siyazan project, he was not involved in the Neftchala project either. Nor was he involved in any further consideration of the Siyazan project. The Lord Ordinary concluded that this tended to support Mr Baxter's evidence that he had not been instructed to explore new opportunities on behalf of COGCL.

[45] On 6 September 2004 Mr Baxter had a meeting with Mr McBain in London. He told Mr McBain that he was prepared to help develop the business if Mr McBain was agreeable. Mr McBain's reaction was neutral. The matter was left on the basis that Mr Baxter would travel to Baku, and Mr McBain would get back to Mr Baxter with a proposal if he was interested. On 10 September 2004 the second consultancy agreement expired. Any involvement by Mr Baxter in capturing a new project was therefore not to be covered by that agreement. The Lord Ordinary held that there was no indication that any such involvement was to be undertaken as a director of COGCL. Nor was there any indication that Mr Baxter had been asked to undertake either the initial journey to Baku, or any further work which might follow on from that, in the capacity of a director of COGCL.

[46] At about this time Mr Baxter was involved again in the consideration of the "COGCL comments" on the draft joint operating agreement to be entered into by CGL under the terms of the South-West Gobustan EDPSA. The Lord Ordinary concluded that he and Mr McBain were acting in the interests of COGCL, whose interests they represented on the board of CGL, as well as those of CGL.

[47] On 4 October 2004 Mr Baxter was asked by e-mail to sign and return a resolution of the directors of COGCL altering the authorised signatories in respect of COGCL's account with the National Westminster Bank. The resolution removed him from the list of authorised signatories. Such a resolution required to be signed by all the directors.

[48] On 23 December 2004 Mr Baxter received an e-mail from Mr Khait on the subject of "proposed offshore fields". Mr Khait wrote that what he described as "the proposed area" included an oil field at Alat-Deniz. Mr Baxter had not pursued this project during his earlier visits to Baku. Nor had he been aware of it at the time of his previous meetings with Mr McBain. It had emerged as a result of Mr Khait's discussions with SOCAR officials.

[49] The area covered by the Memorandum of Understanding ("the Eurasia block") was subsequently delineated by Mr Baxter, and differed in some respects from the area mentioned in Mr Khait's e-mail. Its north-western edge was contiguous with the coastal block of the South-West Gobustan EDPSA, the boundary between them being the coastline. At that point, the nearest oilfield to the coastal block, namely the Alat-Deniz oil field, lay more than a mile offshore. The Alat-Deniz oilfield was a separate structure from the oilfields in the coastal block. Until the Eurasia block was delineated by Mr Baxter, it was not recognised as an oil and gas block.

[50] On 1 February 2005 Mr Baxter e-mailed Mr McBain to suggest that they hold a meeting "to catch up on a number of issues". They met on 17 February. At the meeting on 17 February, Mr Baxter again raised with Mr McBain the possibility of his pursuing development opportunities for the Arawak group. He asked what types of project Mr McBain was interested in. Mr McBain responded that he was interested in onshore projects. Mr Baxter discussed with Mr McBain how he might be rewarded if he found further opportunities. The sticking point in the discussion was that Mr McBain wanted exclusivity on anything Mr Baxter found: in other words, he wanted any project found by Mr Baxter to be placed at the disposal of the Arawak group. Mr Baxter had made it clear to Mr McBain, if not at that meeting then previously, that he wanted to develop a project in which he would have a proprietary interest. Mr McBain did not respond positively.

[51] At the meeting Mr Baxter did not inform Mr McBain about the potential offshore project. He wished to keep the matter confidential, not only from Arawak but more generally. He saw no need to inform Mr McBain. He saw no conflict between this potential project and anything which Arawak were pursuing or were interested in. He had asked Mr McBain what types of project he was interested in, and Mr McBain had said that his interest was in onshore projects. According to Mr Baxter, who gave detailed reasons in evidence for doing so, he did not think that the Eurasia block would be of interest to Arawak. Even as at the date of the proof, in September 2007, the Arawak group had not taken part in an offshore project in shallow water anywhere in the world: all its projects were onshore and low risk. It was irrelevant that the Alat-Deniz oilfield was offshore from the South-West Gobustan coastal block: it was a separate geological structure. Mr Baxter candidly acknowledged, however, that he would not have told Mr McBain about the project even if he had said that he was interested in offshore projects.

[52] Mr Baxter also observed in evidence that, even if a given project might be of interest to Mr McBain, it did not follow that it would involve COGCL. COGCL was a holding company, which held a minority interest in CGL. It could not be assumed that everything that Arawak decided to do in Azerbaijan would be done through COGCL. Even if he had told Mr McBain about the project in question, and Mr McBain had said that COGCL was interested, he (Mr Baxter) would not have pursued it on behalf of COGCL. Mr Baxter accepted, however, that the Arawak group, including COGCL, was interested in taking forward opportunities in Azerbaijan. He accepted that Arawak and its subsidiaries had made clear their interest in securing additional projects in Azerbaijan, and that COGCL had attempted to pursue development opportunities at Siyazan and Neftchala. He accepted that he had been aware of that. He accepted that COGCL was one of the companies which Arawak might use to take forward any opportunity. He accepted that he had made a conscious decision not to bring the Alat-Deniz project to the attention of COGCL. He nevertheless maintained that he had not regarded himself as free to ignore the best interests of COGCL, and that he had always acted in the company's best interests.

[53] At about the time of this meeting, Mr Baxter asked Mr McBain how much he (Mr Baxter) would be paid to bring a project to Arawak. Mr Baxter indicated that he wanted a carried interest (i.e. a share of the profits, after the costs had been deducted) of the order of 20 per cent. Mr McBain was surprised by what Mr Baxter wanted, and said he would think about it. The matter was never raised again. Mr McBain had assumed, when Mr Baxter asked what would happen if he found a new business, that he had not in fact found anything: it never crossed his mind that Mr Baxter had actually uncovered a project. Equally, it never crossed his mind that Mr Baxter might go elsewhere with any opportunity which he might find: it was "inconceivable" to him that Mr Baxter would not act in the best interests of a company (Arawak) which he had founded and which had made him wealthy.

[54] Mr McBain accepted that, at the meeting on 17 February, he might have said that he was interested in onshore projects. But, while Arawak was desperate for projects in Azerbaijan, and his preference would have been for onshore projects, if Mr Baxter had told him of the offshore opportunity, he would have "been on it in a heartbeat". It would be ludicrous to suggest that because the opportunity was offshore, it would have been of no interest. Asked why, if Arawak was desperate for projects, he had not made an arrangement with Mr Baxter as to the basis on which he might find projects for Arawak, Mr McBain answered that Mr Baxter was a large shareholder in the company. Mr McBain's assumption appeared to have been that, since Mr Baxter owned about 3 per cent of Arawak's share capital, it would be in his interests to find projects and bring them to Arawak, whether or not any agreement had been reached as to his remuneration or participation in the project.

[55] In relation to the question whether the possibility of an agreement with SOCAR in respect of the potential exploration of the offshore structures in the Eurasia block would have been of interest to Mr McBain, it appeared to the Lord Ordinary that the answer to the question depended on the context in which it was considered. He was not convinced, on a balance of probabilities, that Mr McBain would have been interested in pursuing the possibility of a project in relation to the Eurasia block, if he had merely been informed of the existence of the structures there in December 2004 or February 2005. The existence of the Alat-Deniz oilfield had been public knowledge for many years. If the Arawak group had had an interest in offshore exploration, they would have found out about it. He accepted that Mr McBain's focus was on onshore exploration, as he told Mr Baxter at the meeting on 17 February 2005. If, on the other hand, the question was whether Mr McBain would have been interested if Mr Baxter had told him that contacts at SOCAR had directed his attention to a proposed area for exploration, that the proposed area was in shallow water offshore and included an established oilfield, and that he (Mr Baxter) thought that there were reasonable prospects of securing an agreement with SOCAR in relation to the proposed area, then it seemed to the Lord Ordinary that Mr McBain would probably have been interested. The principal problem in Azerbaijan, as Mr McBain's evidence made clear, was not finding oilfields or structures which might be suitable for exploration, but securing agreements with SOCAR; and Mr Baxter's track record, and his continuing relationship with SOCAR, demonstrated that he might be in a position to deliver such an agreement. The closer Mr Baxter got to such an agreement, the more likely it was that Mr McBain would have been interested.

[56] If the question was considered as at a point in time shortly before the Memorandum of Understanding was executed, and therefore after Mr Baxter had successfully carried out his negotiations with SOCAR - if, in other words, the question was whether Mr McBain would have been interested if Mr Baxter had offered him the Memorandum of Understanding "on a plate" - then the question should certainly be answered in the affirmative. Although Mr McBain's evidence that he was "desperate" to find another project in Azerbaijan appeared to the Lord Ordinary to be somewhat overstated, he had no doubt that he would at least have wanted to investigate a potential offshore project which had reached the stage of an exclusive agreement with SOCAR for access to data and for an opportunity to negotiate an EDPSA. The possibility of such an agreement was not in Mr McBain's mind when he told Mr Baxter that his interest was in onshore projects.

[57] The Lord Ordinary also accepted that it was more likely than not that the company on whose behalf Mr McBain would have acted in relation to the Memorandum of Understanding, if the opportunity had arisen, was COGCL. This was the company which held Arawak's assets in Azerbaijan; and, if another asset had been acquired, it would probably have been held by COGCL via a corporate vehicle formed for the purpose, analogous to CGL.

[58] He also concluded that a reasonable person in Mr Baxter's position would have known that such an agreement with SOCAR would have been of interest to Mr McBain. Such a person would have realised that there was at least a real possibility that the company on whose behalf Mr McBain would have acted, in that regard, was COGCL. Nevertheless, having given the matter careful consideration, he was prepared to accept that Mr Baxter saw no conflict between the potential project and anything which Arawak were pursuing or might realistically be interested in, given Mr McBain's statement that his interest lay in onshore projects, the Arawak group's history of looking only at onshore opportunities, and the risks involved in the project in question. The import of Mr Baxter's evidence as a whole was that, although it was commercially prudent to keep the information about the opportunity to himself, so as to ensure that it did not leak out, he believed that the opportunity was not one which the Arawak group would have wished to pursue. His conclusion, based principally on the impression he formed of Mr Baxter over the four days during which he gave evidence, was that that was a genuine belief. He also doubted whether Mr Baxter would have written to Mr McBain as he did on 9 December 2005 (as explained below) if he had been conscious of having breached his duties to COGCL: if, in other words, he had been acting in bad faith.

[59] On 31 March 2005 Mr Baxter became a director of PAVL. Mr McBain and Mr Baxter met again on 3 May, and at social events on 8 and 19 June. They had a further meeting on 8 July. They also corresponded by e-mail. The matters which had been discussed at the meeting on 17 February were not raised.

[60] In about October 2005 Mr Baxter signed a resolution of the COGCL board of directors altering the authorised signatories in respect of COGCL's account with Scotia Bank Anguilla Ltd. As previously, he was e-mailed the resolution for signature and return.

[61] On 28 November 2005 Mr Baxter was appointed president and chief executive officer of PAVL. On the same date, the directors approved a change of the company's name to Eurasia Energy Ltd ("Eurasia"). The change took effect on 12 January 2006, but for convenience I shall henceforward refer to the company as "Eurasia". Mr Baxter subsequently wrote to Mr Little that he had been appointed president and chief executive officer "on the understanding that [he] would attempt to find an interesting project to contribute to the company". Mr Baxter said in evidence that the project which he contributed was the one which became the Memorandum of Understanding. He had initially developed the project in question without knowing in what entity it would end up: it was a project he was developing for his own proprietary interest. Asked whether it could have gone to Arawak or to Eurasia, Mr Baxter replied that it could have: it could have gone to any company. The point in time of the decision would have been about the time when he needed to execute the Memorandum of Understanding in December 2005. In the light of his appointment as president and chief executive officer of Eurasia on 28 November and the decision taken then to change the company's name, and bearing in mind also what Mr Baxter wrote to Mr Little, it appeared likely to the Lord Ordinary that the decision had in fact been taken by that date.

[62] On 7 December 2005 the Memorandum of Understanding between SOCAR and Eurasia was executed. Under it, Eurasia was granted an exclusive right, for a period of twelve months, to negotiate with SOCAR on the terms of a possible further agreement relating to the exploration and development of the Eurasia block, which included the producing Alat-Deniz oilfield and seven prospective exploration structures. The block trended in a south-easterly direction from the coast to 70 kilometres offshore. The north-western edge of the block was contiguous with CGL's coastal block.

[63] Mr Baxter accepted in evidence that the conclusion of the Memorandum of Understanding was secured as a result of his efforts, and that he had actively pursued the opportunity to enter into that agreement. He and Mr Khait had used the know-how and contacts which they had built up when working on the South-West Gobustan EDPSA in order to secure the Memorandum of Understanding. There was no evidence that Mr Baxter used any contacts, knowledge, expertise or information which he acquired as a director of COGCL from April 2004 onwards in order to secure the Memorandum of Understanding. It was clear that he did not learn of the oilfield and structures in what became the Eurasia block, or of the possibility of entering into an agreement with SOCAR in relation to that oilfield or those structures, by virtue of his directorship of COGCL. Nor could the opportunity to enter into such an agreement be attributed to that directorship.

[64] During the period between Mr Baxter's becoming a director of COGCL and the execution of the Memorandum of Understanding no meetings were held of the board of directors. Mr Baxter was not requested to do anything specifically as a director, other than to sign two resolutions altering the authorised signatories of the company's cheques. He took no part in the management or control of any operations of COGCL. After reviewing the evidence, the Lord Ordinary concluded that Mr Baxter's directorship had no unambiguous manifestation, other than his signature of the two resolutions. On the other hand, he was in frequent contact with Mr McBain and other Arawak staff in relation to the affairs of the Arawak group (including COGCL) in Azerbaijan, in a context where he was in fact a director of COGCL and of CGL, and where little attention appeared to have been paid to the distinct identities of the various companies or to the different capacities in which persons might be acting. Between 13 April 2004 and the end of 2005, Mr Baxter was a director of COGCL, and he was looking for new projects. But the Lord Ordinary accepted that he had not been given that function as a director of COGCL.
[65] On 9 December 2005 Mr Baxter e-mailed Mr McBain, informing him, among other things of the Memorandum of Understanding. On 13 December they met in London. Mr McBain congratulated Mr Baxter on his success, and expressed interest in the project. He said that it put him in a difficult position, because Mr Baxter had succeeded where Arawak had failed. He suggested ways in which Arawak might participate in the project. It became apparent to him that Mr Baxter was not willing to allow Arawak to participate at that stage, although he said that he did not discount the possibility of Arawak being involved at a later stage. He could not contemplate that the project was not going to become part of Arawak's operation in some form or other. The best plan was to keep a dialogue going with Mr Baxter. He was willing to discuss terms and rewards.

[66] On 21 December Eurasia filed an information statement with the United States Securities and Exchange Commission. The statement bore to be furnished by the board of directors and was signed by Mr Tuskey, who was a director of the company and its chief financial officer, secretary and treasurer. It stated that the company had issued more than 20 million shares, of which 3 million (14.95 per cent) were held by Mr Baxter. It was apparent from the statement that it was a public company. Its directors were Mr Baxter, Mr Tuskey and Ms King. According to the statement, the company had been carrying on business since October 2003 and its management had been considering potential opportunities. The statement included this passage:

"[O]ur director, Mr Nicholas W Baxter, has been proactive in pursuing an opportunity in the oil and gas industry based on his previous experience and contacts in that industry."

The statement contained information about the Memorandum of Understanding, and described how that "potentially lucrative opportunity" had been obtained through Mr Baxter's efforts. It described Mr Baxter's previous involvement in the oil and gas industry, and stated that he had been a director of Arawak until 2003. No mention was made of COGCL.

[67] On 5 January Mr Baxter contacted Mr McBain in relation to GOC. Mr McBain replied:

"I am really hoping that we are going to be able to continue working together in some form. However, your latest news continues to worry me. Do you think there is anything we can do which can work for both parties? Is it worth meeting?"

Mr McBain had been "rather stunned" to discover that the Memorandum of Understanding had been entered into by a public company. He was grasping at ways of avoiding a confrontation. One possibility was an arrangement under which Arawak and Eurasia would both have an interest in the project. He had several conversations with Mr Baxter in early January in which he attempted to negotiate such an arrangement.

[68] On 11 January Mr Baxter learned from Mr McBain that certain directors were unhappy about his involvement with Eurasia. On 25 January Mr Baxter offered to resign his directorships of COGCL, CGL and GOC. He received an acknowledgement on 2 February. On 6 February Mr Baxter tendered his resignation. In his letter of resignation, he stated, in conventional terms, that he had "enjoyed ... serving as a director of COGCL".

[69] On 8 November 2006 Mr Baxter wrote to SOCAR, on behalf of Eurasia, formally requesting the commencement of negotiation of the Agreement on the Basic Commercial Principles and Provisions of the EDPSA, as envisaged by clause 2 of the Memorandum of Understanding. On 24 November Mr Baxter wrote again to SOCAR, on behalf of Eurasia, requesting an extension of the period for negotiating that agreement.

[70] On 18 January 2007 the president of SOCAR wrote to Mr Baxter, in response to his letter of 24 November, refusing to extend the period for negotiations, and stating that the Memorandum of Understanding had terminated.

The first issue
[71] The leading authorities concerning the fiduciary duties of directors of companies are well known. In Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq. 461 the issue was the validity of a contract, for the supply of iron chairs required for the permanent road of the line of railway which had been entered into between the manufacturers, of whom Mr Thomas Blaikie was the managing partner, and the railway company, of which Mr Blaikie was a director and indeed the chairman. The House of Lords held that the contract was invalid. Lord Cranworth LC said at page 471:

"The Directors are a body to whom is delegated the duty of managing the general affairs of the Company.

A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.

So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into."

At pages 472-3 his Lordship said:

"Mr Blaikie was not only a Director, but (if that was necessary) the Chairman of the Directors. In that character it was his bounden duty to make the best bargains he could for the benefit of the Company. ... His duty to the Company imposed on him the obligation of obtaining these chairs at the lowest possible price.

His personal interest would lead him in an entirely opposite direction, would induce him to fix the price as high as possible. This is the very evil against which the rule in question is directed, and I here see nothing whatever to prevent its application."

The previous decision of the House of Lords in the Scottish case of York Buildings Co v Mackenzie (1795) 3 Pat. App. 378 was commented on and expounded. Reference was also made to the Digest 18.1.34.7, and to English authorities. Lord Brougham said at page 477:

"I also arrive at exactly the same conclusion with my noble and learned friend, that the law of Scotland differs in no respect from the law of England upon this matter; as to which it is very important to have it understood, that there is really no difference between the two systems of jurisprudence."

[72] The "rule of universal application" formulated by Lord Cranworth has been consistently applied in subsequent cases both north and south of the border. In Bray v Ford [1896] AC 44, for example, Lord Herschell said at page 51:

"It is an inflexible rule of a Court of Equity that a person in a fiduciary position ... is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect."

As was recognised in Aberdeen Railway Co v Blaikie Bros, there is of course no distinction in Scotland between courts of equity and courts of law.

[73] The words "possibly may conflict" in Lord Cranworth's formulation were explained in Boardman v Phipps [1967] AC 46. At page 125 Lord Upjohn said:

"There has been much discussion in the courts below and in this House upon the observations of their Lordships in the Regal case [Regal (Hastings) Ltd v Gulliver, decided in the House of Lords on 20 February 1942 and reported as a note at [1967] AC. 134]. But in my view, their Lordships were not attempting to lay down any new view on the law applicable and indeed could not do so for the law was already so well settled. The whole of the law is laid down in the fundamental principle exemplified in Lord Cranworth's statement I have already quoted. But it is applicable, like so many equitable principles which may affect a conscience, however innocent, to such a diversity of different cases that the observations of judges and even in your Lordships' House in cases where this great principle is being applied must be regarded as applicable only to the particular facts of the particular case in question and not regarded as a new and slightly different formulation of the legal principle so well settled."

[74] Before the passage I have just quoted, Lord Upjohn spoke at page 123 of "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 position where his duty and his interest may conflict." Many examples may of course be found of the application of this rule. In Bristol and West Building Society v Mothew [1998] Ch. 1, for example, Millett LJ said at page 18:

"The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of a fiduciary. ...

A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other ...". (emphasis in original)

[75] Notwithstanding the generality of these statements of high authority, counsel for Mr Baxter submitted that a director's fiduciary obligation, so far as relevant to his dealings with third parties, is merely to forebear from using for his own benefit the property of the company or information which is confidential to the company. Support for this was said to be found in London & Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165 ("Mashonaland"). Chitty J is reported as having said, in dismissing an application by way of motion on behalf of the plaintiff company to restrain the defendant company from publishing any announcement that Lord Mayo was one of its directors, and to restrain him from authorising or permitting any such publication, and from acting as director of the defendant company:

"[E]ven assuming that Lord Mayo had been duly elected chairman and director of the plaintiff company, there was nothing in the articles which required him to give any part of his time, much less the whole of his time, to the business of the company, or which prohibited him from acting as a director of another company; neither was there any contract express or implied to give his personal services to the plaintiff company and to another company. No case had been made out that Lord Mayo was about to disclose to the defendant company any information that he had obtained confidentially in his character of chairman ..."

[76] It would be difficult to treat this single-judge decision on an interlocutory application as providing a secure foundation for the erection of any principle of general application were it not that in Bell v Lever Brothers Ltd [1932] AC 161 Lord Blanesburgh so treated it at page 195. After referring to a quotation which the judge at first instance had read to the jury, he went on to say:

"[B]oth from its wording, and also from its close similarity to Lord Cranworth's locus classicus on the subject printed in the headnote to Aberdeen Ry Co v Blaikie Brothers, I can have little doubt that, like Lord Cranworth's statement, the quotation is concerned with a company's contracts in which, on the other side of the table, a director is interested, and with reference to which the company's regulations are silent. The quotation is not addressed to a director's own contracts with outsiders in which the company has no financial interest at all. ...

And this brings me to the position of a director in relation to contracts of the second class, with which we are here alone concerned. The principle will be found in the case usually cited in relation to it ... of [Mashonaland], where it was held that, it not appearing from the regulations of the company that a director's services must be rendered to that company and to no other company, he was at liberty to become a director even of a rival company, and it not being established that he was making to the second company any disclosure of information obtained confidentially by him as a director of the first company he could not at the instance of that company be restrained in his rival directorate. What he could do for a rival company, he could, of course, do for himself."

[77] There may be room for doubt as to how far reliance on Mashonaland formed part of the ratio of the decision in Bell v Lever Brothers Ltd; certainly, none of their Lordships apart from Lord Blanesburgh expressly referred to it. In any event, Lord Blanesburgh was applying what he regarded as a principle to "a director's own contracts with outsiders in which the company has no financial interest at all." Provided that this important qualification is recognised - although it is not found in Mashonaland itself - Lord Blanesburgh's dictum can be reconciled with other authorities. In Meyer v Scottish Co-operative Wholesale Society Ltd 1958 SC (HL) 40, for example, Lord Denning said, of the circumstances of that case, at page 67:

"So long as the interests of all concerned were in harmony, there was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position."

As Sedley LJ said in In Plus Group Ltd v Pyke [2002] 2 BCLC 201 at paragraph 84, the Mashonaland principle is a very limited one. In a lengthy discussion of it he said, at paragraph 80:

"The fiduciary duty of a director to his company is uniform and universal. What vary infinitely are the elements of fact and degree which determine whether the duty has been breached."

In putting the matter in this way, Sedley LJ did of course have in mind the classic formulation of the principle in Aberdeen Railway Co v Blaikie Bros as explained in Boardman v Phipps.

[78] The key question in every case is whether, in the particular circumstances of that case, there is a real sensible possibility of conflict. It may be that there were circumstances in Mashonaland which do not appear from the brief report of that case and which would justify the conclusion that there was there no conflict. Prima facie, a person who is a director of two companies with competing interests falls foul of Aberdeen Railway Co v Blaikie Bros: his duty to each conflicts with his interest in the other. This conflict may be avoided by the giving by the first company of informed consent to its director's pursuing his own interest, either as director of the second or on his own account, and informed consent in turn depends on full disclosure: see Item Software (UK) Ltd v Fassihi [2005] 2 BCLC 91, and in particular the discussion by Arden LJ at paragraphs 38 to 44 of Bhullar v Bhullar [2003] BCLC 241 and Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. It may also be that, in the circumstances of a particular case, a director is so effectively excluded by the actings of his fellow directors from the management of the general affairs of the company that it may be inferred that by so acting they have released him from his fiduciary duties to the company and impliedly consented to his pursuing his own interests, even if those interests conflict with those of the company; but in such a case account would also have to be taken of the question whether in such circumstances he should resign before pursuing his own interests: cf. Foster Bryant Surveying Ltd v Bryant [2007] 2 BCLC 239.

[79] An attempt was made by counsel for Mr Baxter to persuade us that the principle in Aberdeen Railway Co v Blaikie Bros only applies where the conflict arises between a director's personal interests (whether as an individual or through the medium of another company) in relation to commercial opportunities of which he had become aware in the exercise of his function as director of the company or which, as it was put, he had been "tasked" to pursue on behalf of the company. I am entirely unable to accept this argument, which is not supported by the leading authorities. To go back to Aberdeen Railway Co v Blaikie Bros, Lord Cranworth said that the directors are a body to whom is delegated a duty of managing the general affairs of the company. No doubt some members of a board may be executive directors and others non-executive, and executive directors may have specific executive functions which have been delegated to them to perform. But the fact that he has an executive function does not alter a director's status: he is a director of the company as a whole, and his duties to the company are to manage the general affairs of the company and are not confined to the responsibilities arising from his executive function. A director's fiduciary duty of loyalty is owed to the company as a whole; and the duty to avoid a conflict of interest must be related to the interests of the company as a whole.

[80] It is not in dispute that Mr Baxter was at all material times, from 13 April 2004 onwards, a director of COGCL. His appointment as a director altered his position. It was accepted before us on his behalf that as such he owed fiduciary duties to the company. I agree with the Lord Ordinary that, for the reasons given above, the fact that he was a non-executive director does not mean that he did not owe to the company the same fiduciary duties as its executive directors owed to it. Although he was not involved in the day-to-day running of COGCL's business, his role as a non-executive director of a wholly-owned subsidiary of a listed company was not merely nominal. There is no question of his having been effectively excluded from the management of the affairs of the company. He possessed, under the By-Law and under company legislation, a variety of powers, including the power to convene meetings of the board. The fact that these powers were exercised seldom, if at all, is neither here nor there. There was nothing to prevent him from exercising them. It may be that his only reason for becoming a director was to secure tax relief; but for that same reason his directorship required to be a reality and not a sham. By becoming a director, he not only gained a fiscal advantage, but he also undertook the responsibilities of loyalty and good faith owed by a director. He was under the same duty as any other director to act in what he, in good faith, considered to be the best interests of the company. He was under an obligation not to place himself in a position where his own interests conflicted with his performance of that duty, and not to act for his own benefit or for the benefit of a third party, in a situation of potential conflict, without the informed consent of COGCL.

[81] When Mr Baxter signed the Memorandum of Understanding on 5 December 2005 on behalf of Eurasia, he clearly had a personal interest in that opportunity through his interest in Eurasia. The Lord Ordinary found in fact that, although COGCL was not pursuing offshore opportunities, it had been involved in pursuing efforts to identify new business opportunities in Azerbaijan, and that at the very least, a reasonable person would have thought that there was a real sensible possibility that the opportunity to enter into the Memorandum of Understanding would have been commercially attractive to COGCL. So long as he remained a director of COGCL, the only way in which Mr Baxter could have avoided a conflict of interest would have been to obtain the informed consent of the other members of the board of directors of the company, in their capacity as such, to his pursuing, through Eurasia, the commercial opportunity relating to the exploration and development of the Eurasia block. Far from obtaining their informed consent, he did not, in particular, inform Mr McBain about the potential offshore project at the meeting on 17 February 2005. While the Lord Ordinary was prepared to accept that he was acting in good faith, and therefore not dishonestly, Mr Baxter nevertheless failed to take appropriate steps to avoid a conflict of interest.

[82] In putting the matter in this way, I do not intend to suggest that Mr Baxter's fiduciary duties as a director included a duty to disclose or communicate to COGCL information which it was relevant to it to know. The Lord Ordinary appears to have proceeded on the basis that there was such a positive duty, and there are passages in the judgment of Parker LJ in Bhullar v Bhullar and of Arden LJ in Item Software (UK) Ltd v Fassihi which might be thought to provide some support for this approach. I do not go so far as this, and indeed neither party before us argued that that was the correct approach. I proceed on the basis simply that the need for disclosure arises at the stage at which informed consent is sought. Mr Baxter did not seek informed consent. And, in my opinion, it inevitably follows that in signing the Memorandum of Understanding on behalf of Eurasia he was in breach of his fiduciary duties to COGCL.

[83] In my opinion, therefore, Mr Baxter is not entitled to succeed on the first issue, and the reclaiming motion must be refused.

The second issue
[84] COGCL's claim against Eurasia is based on the proposition, contained in a plea-in-law, that, having suffered loss, injury and damage by reason of Mr Baxter's breaches of fiduciary duties and by reason of Eurasia's knowing receipt of a commercial opportunity brought to it in breach of Mr Baxter's fiduciary duties, COGCL is entitled to reparation from them.

[85] The expression "knowing receipt" is derived from a passage in the speech of Lord Selborne LC in Barnes v Addy (1874) 9 L.R. Ch. App. 244 at pages 251-252:

"Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found ... actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees."

It is not in doubt that this passage may be treated as an authoritative statement of the law of Scotland as well as that of England (with the substitution of "beneficiary" for "cestui que trust"; and noting that there is not, and never has been, any distinction between courts of equity and courts of law in Scotland.): see, for example, Menzies on Trustees (2nd ed., 1913), paragraph 1286. Of the three categories of constructive trust set out in Menzies on Trustees, paragraph 1271, this falls into the second:

"[W]here funds affected with a trust come into the hand of another than the beneficiary, either gratuitously or with knowledge of a breach of the trust, the transferee is a constructive trustee."

[86] The liability contemplated by Lord Selborne may arise in either of two categories, which may be termed respectively "knowing receipt" and "knowing assistance". Before the Lord Ordinary, COGCL appears to have based its claim against Eurasia principally on knowing assistance. Since it was accepted that this depended on proof in the first place of dishonesty on the part of Mr Baxter, and since the Lord Ordinary concluded that he did not knowingly act in breach of his fiduciary duties, the claim on this basis failed. Before us, it was confirmed that COGCL now relies on knowing receipt alone as the basis for its claim against Eurasia and expressly disclaims any reliance on knowing assistance.

[87] The requirements of a claim to enforce a constructive trust on the basis of knowing receipt were succinctly set out in modern terms in El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 by Hoffmann LJ at page 700:

"For this purpose the plaintiff must show, first, a disposal of his assets in breach of fiduciary duty; secondly, the beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff; and thirdly, knowledge on the part of the defendant that the assets he received are traceable to a breach of fiduciary duty."

[88] Counsel submitted that the Memorandum of Understanding was an asset of COGCL, which was impressed from the outset with a constructive trust in favour of COGCL by reason of its having been entered into in breach of Mr Baxter's fiduciary duty to them. On execution of the Memorandum of Understanding, Mr Baxter was a constructive trustee, and when it came into the hands of Eurasia it was impressed with that trust. It did not affect the outcome that Mr Baxter used Eurasia as a corporate vehicle: cf. CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 per Lawrence Collins J at paragraph 104. Mr Baxter chose to execute the Memorandum of Understanding on behalf of Eurasia. The Memorandum of Understanding was impressed from the outset with a constructive trust, and simultaneously Eurasia received the benefit of it. This constituted disposal.

[89] The only remaining question, the submission continued, was whether Eurasia received the benefit of the Memorandum of Understanding knowing that it came its way as a result of Mr Baxter's breach of fiduciary duty. Counsel referred to a series of English authorities. In Belmont Finance Corporation v Williams Furniture Ltd (No.2) [1980] 1 All ER 393 Buckley LJ said at page 405:

"[I]f the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds."

Actual knowledge of the breach of trust was therefore not required, and constructive knowledge would suffice. In Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437 Nourse LJ said at page 455:

"... I have come to the view that, just as there is now a single test of dishonesty for knowing assistance, so ought there to be a single test of knowledge for knowing receipt. The recipient's state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt. A test in that form, though it cannot, any more than any other, avoid difficulties of application, ought to avoid those of definition and allocation to which the previous categorisations have led. Moreover, it should better enable the courts to give commonsense directions in the commercial context in which claims in knowing receipt are now frequently made ..."

In Charter plc v City Index Ltd [2008] Ch 313 it was held (per Mummery and Carnwath LJJ) that liability for the tort of knowing receipt depended on the recipient of moneys having sufficient knowledge of the circumstances of the payment so as to make it unconscionable for him to retain the benefit of the receipt or to pay it away for his own purposes, and did not depend solely on the payment being in breach of trust.

[90] On the basis of these authorities, counsel submitted that unconscionability was the keystone. The remedy in cases of knowing receipt might differ, depending on the circumstances. Although the recipient might be liable in restitution, he might equally be liable in damages where the claimant sought compensation for loss. This was highly material for the present case where, if there was a remedy, it must be for loss.

[91] Counsel for COGCL went on to submit that there was no inconsistency between the English and the Scottish approaches. This could be demonstrated by reference to Thomson v Clydesdale Bank Ltd (1893) 20 R (HL) 59, in which Lord Herschell LC said at page 60:

"My Lords, I cannot assent to the proposition that even if a person receiving money knows that such money has been received by the person paying it to him on account of other persons, that of itself is sufficient to prevent the payment being a good payment and properly discharging the debt due to the person who receives the money. No doubt if the person receiving the money has reason to believe that the payment is being made in fraud of a third person, and that the person making the payment is handing over in discharge of his debt money which he has no right to hand over, then the person taking such payment would not be entitled to retain the money, upon ordinary principles which I need not dwell upon."

Lord Shand said at page 63:

"... I agree with the Lord Chancellor in thinking that there is no evidence whatever here of facts which put the bankers on inquiry, or which can be founded on as shewing that they must have believed or known that this was a misapplication of funds."

A consistent approach could found in Style Financial Services Ltd v Bank of Scotland 1996 SLT 421, Style Financial Services Ltd v Bank of Scotland (No.2) 1998 SLT 851, Devron Potatoes Ltd v Gordon & Innes Ltd 2003 SCLR 103 and JS Cruickshank (Farmers) Ltd v Gordon & Innes Ltd [2007] CSOH 113.

[92] In summary therefore, counsel submitted, whereas liability for knowing assistance depended on dishonesty, liability for knowing receipt did not. Correctly understood, Thomson v Clydesdale Bank Ltd established, consistently with Belmont Finance Corporation Ltd v Williams Furniture Ltd, Bank of Credit and Commerce International (Overseas) Ltd v Akindele and Charter plc v City Index Ltd, that actual knowledge by the recipient of a breach of trust or breach of fiduciary duty was not required provided that the facts and circumstances known to the recipient were sufficient to give him reason to believe that the asset came to him by virtue of an underlying breach of trust or breach of fiduciary duty. In such circumstances it would be unconscionable to permit the recipient to escape liability, whatever form the remedy might take.

[93] Applying this approach, derived from the authorities, to the factual circumstances, counsel submitted that Mr Baxter held the office of director in COGCL and was therefore in a fiduciary relationship with them. While Eurasia were not in a direct relationship with COGCL, they were also to be regarded as constructive trustees so far as concerned the Memorandum of Understanding by virtue of the circumstances of its receipt. Both Mr Baxter and Eurasia therefore were under an obligation to account to or to compensate COGCL. It was unconscionable that Eurasia should have been able to obtain the benefit of the Memorandum of Understanding without any remedy being available to COGCL. Although COGCL did not seek to challenge the Lord Ordinary's finding that Mr Baxter genuinely believed that the commercial opportunity was not one that COGCL would wish to develop, they submitted that nevertheless he knew that he was a director of both COGCL and of Eurasia and that COGCL were actively seeking new business opportunities in the oil industry in Azerbaijan. He knew that the Eurasia block was geographically adjacent to the south Gobustan block. A reasonable person, knowing those facts, would have been placed on his enquiry. What were to be attributed to Eurasia were the facts known to Mr Baxter, not what he believed or the conclusions he drew, however erroneously. The Lord Ordinary found that the facts known to him would at least have led a reasonably objective third party to conclude that COGCL had a commercial interest in the subject-matter of the Memorandum of Understanding. Such a party would then have concluded that Mr Baxter did not have informed consent to do what he was doing, and that afforded a sufficient basis for the inference that Eurasia knew that Mr Baxter was acting in breach of his fiduciary duty to COGCL. When executing the Memorandum of Understanding, his fiduciary duties obliged him to give it to COGCL; to give it to anyone else would have been in breach of his fiduciary obligations.

[94] It appears to me to be clear from the authorities quoted above that knowing receipt depends in the first place on the prior existence of an asset which is subject to a trust in favour of a beneficiary. It is the disposal of that asset, in breach of fiduciary duty, and receipt of that asset by the recipient in knowledge of that breach, which together give rise to a constructive trust over that asset in the hands of the recipient. In Barnes v Addy Lord Selborne, in the branch of his speech founded upon by COGCL, used the words "those agents receive and become chargeable with some part of the trust property", that is to say property already in existence and subject to a trust. In Menzies on Trustees the words are "funds affected with a trust". In El Ajou v Dollar Land Holdings plc Hoffmann LJ clearly had in mind, in formulating the three requirements of the claim, that the assets should have been disposed of and received, that is to say that they were already in existence prior to disposal. It is equally clear, in my opinion, that the assets constituted by the rights granted by the Memorandum of Understanding did not exist until they were granted to Eurasia (as it was soon to be named) on the date of execution of the Memorandum of Understanding on 7 December 2005. There is a nebulous concept, found in some passages in COGCL's pleadings, and reflected in some of counsel's submissions before us, that there was a "commercial opportunity" which pre-dated the Memorandum of Understanding and which in itself constituted an asset. While the prospect of entering into the Memorandum of Understanding may, in business terms, properly be regarded as a commercial opportunity, it is in my view erroneous to think of it as an asset, let alone one capable of being impressed with a trust. It was not until the Memorandum of Understanding was entered into that legal rights were created; and those rights were conferred immediately on Eurasia. While no doubt those rights may be regarded as assets - or, more broadly, the Memorandum of Understanding may be regarded as an asset - they were never the property of anyone other than Eurasia. It makes no difference that the Memorandum of Understanding was executed by Mr Baxter: it was executed by him as agent for and on behalf of Eurasia, and not in any other capacity. This being so, the Memorandum of Understanding never constituted an asset forming the property, or part of the property, of a trust in favour of COGCL to which it could lay claim as beneficiary.

[95] There being, in my opinion, no receipt by Eurasia of an asset capable of being described as trust property, the claim against it based on knowing receipt falls at the first hurdle. It therefore becomes unnecessary to consider whether, in the circumstances of the present case, Eurasia was fixed with the requisite knowledge, or what remedy, if any, might be available to COGCL. I observe, however, that the authorities relied upon by counsel for COGCL in this regard serve to reinforce the view I have already come to that knowing receipt depends upon the prior existence of an asset capable of being regarded as trust property. In the passage quoted from Belmont Finance Corporation v Williams Furniture Ltd (No.2) Buckley LJ spoke of the misapplication by directors of the funds of their company "so that they come into the hands of some stranger to the trust". This presupposes the prior existence of the funds. Similar expressions may be found elsewhere. This is as might be expected, because knowing receipt is predicated in the first place upon receipt.

[96] In my opinion, therefore, COGCL are not entitled to succeed on the second issue, and the cross-appeal must be refused.

Result

[97] For these reasons, I agree with your Lordship in the chair that the reclaiming motion by Mr Baxter and the cross-appeal by COGCL must both be refused, and that the case should be remitted back to the Lord Ordinary to proceed as accords.


FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Nimmo Smith

Lady Paton

[2009] CSIH 75

CA5/07

OPINION OF

LADY PATON

in Reclaiming Motion

in the cause

COMMONWEALTH OIL & GAS COMPANY LIMITED

Pursuer, Respondent and

Cross-Appellant;

against

(1) NICHOLAS WILSON BAXTER

First Defender and Reclaimer;

and

(2) EURASIA ENERGY LTD

Second Defender and Cross-Respondent:

_______

Act: Dean of Faculty (Keen, Q.C.), Munro; Brodies, LLP

Alt: Currie, Q.C., Lindsay; McGrigors, LLP

2 October 2009

[98] For the reasons given by your Lordships, I agree that the reclaiming motion and the cross-appeal should be refused. I have nothing to add.