Contract breach over fraud

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Gannons won a court case concerning a contract breach.

Our client was a limited company that invested in high-value commercial properties. The company discovered that a fraudulent financial adviser contracted by the company to manage their books had breached his contractual duty. The financial adviser, a sole trader, had dishonestly managed the company’s books, bank accounts, and records. The financial adviser also extracted funds that he was not authorised to from our client’s company. He claimed a director of the company had verbally agreed to increase his salary, allowing him to receive the extra funds. However, this amounted to a contract breach. We successfully took immediate action on behalf of the company against the sole trader.

How we resolved the contract breach

The company instructed us and we began to take action. First we collated the evidence needed to support the contract breach claim. Using that evidence, we secured an interim injunction protecting the value in our client’s claim. We went on to win the case, which entitled the company to recover all the property obtained by the adviser through his contract breach.

Our case

We showed that the actions of the sole trader amounted to an express contract breach. Even if we had not successfully shown a such an express breach though, we could argue that the financial adviser owed our client a fiduciary duty. Furthermore, the alleged salary increase had not been done in accordance with the terms of the contract.

Unauthorised extraction of funds

As a result, any funds that the sole trader extracted from our client’s company in excess of the agreed remuneration should be, and were, held on resulting trust for our client’s company, together with any assets obtained.

As a result, our client acquired a property business, and recouped the funds the adviser took in the form of shares.

Events constituting contract breach

In 2009, our client hired the adviser to manage their company’s books, and prepare accounts and financial projections. We drafted the contract. The contract provided a fixed remuneration that could only be varied if agreed in writing by both parties. A non-compete clause prevented the adviser from working for other property companies.

In late 2014, the majority company shareholder got divorced. This meant that the company’s accounts needed disclosing to determine the shareholder’s income. This led to the discovery that the financial adviser had taken about £5,000.00 excess remuneration every month since his appointment. The adviser used the funds to finance a personal property venture.

Case tactics

We did not immediately terminate the contract, even though the adviser had breached the non-compete clause. Instead, we collated as much evidence as possible. Then we waited for the next payment to leave the account. Without notice, we took High Court action, and pursued a freezing injunction to prevent the adviser depleting his assets, specifically the shares he held in his competing business.

Securing an immediate injunction

We made a strong case and the High Court granted the injunction. We proceeded to claim, because of the adviser’s contract breach, that his property business be held on resulting trust for our client’s company. This was on the basis that the adviser’s new business was incorporated and managed using our client’s funds – a direct financial contribution giving rise to a resulting trust.

The adviser resisted. He claimed a director of our client’s company had verbally agreed the excess remuneration. Therefore the breach was only for the non-complete clause. If true, this would only entitle our client to terminate the contract and claim damages.

The High Court’s decision over the contract breach

The High Court held that the actions of the adviser amounted to an express contract breach. The adviser had breached the express terms of the contract by extracting cash from the company in excess of the agreed remuneration, and acting in competition. Furthermore, the Court held that the adviser had a fiduciary duty to the company to account for finances, therefore, he had to account to the company for the assets obtained. Finally the contract was clear. It specified that remuneration could only be changed in writing, rather than verbally as the adviser claimed had been done so.

Summary of results

Our client was able to reclaim the cash extracted in the form of the adviser’s shares held in the limited company he had incorporated. Accordingly, all the property obtained through the adviser’s contract breach belonged to the company.

John Deane heads the commercial team at Gannons. John deals with a variety of contentious matters relating to contract termination and the consequences. Please do not hesitate to get in touch if you wish to discuss an issue. 

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