Bringing welcome clarity to a difficult area in the law, the Court of Final Appeal has handed down judgment in 

[2024] HKCFA 32, confirming that a 6-year limitation period applies to proprietary claims against fiduciaries for unauthorised profits acquired from third parties.

While it has been long recognised that fiduciaries who make unauthorised profits hold these profits on constructive trust for their principals, there have been conflicting authorities as to whether and when such trusts fall within “class 1” (thus not subject to any limitation period by virtue of s.20(1) of the Limitation Ordinance), or “class 2” (to which a 6-year limitation period may be applied).

Relying in particular on extrajudicial writings by Lord Millett and academic commentaries, the plaintiff in the present case contended that his proprietary claim against the defendant for unauthorised profits fell within “class 1”. He argued that this trust was consensual in nature, since the law deems the fiduciary as having intended to obtain the profit for his principal.

Giving the leading judgment, Lord Hoffmann NPJ explained that the fiction that a fiduciary is deemed to hold the secret profits on behalf of and for his principal should not to be read into the rules on limitation, as the reasons for that rule have nothing to do with limitation. As his Lordship put it, “there is too much of this damned deeming.” The plaintiff’s claim was in fact one for breach of duty and fell outside the scope of “class 1” explained in the English and Hong Kong cases. The trust was subject to a 6-year limitation period under s.20(2), even if that would involve giving the word “trustee” a different meaning in the two subsections of s.20.

The Court also held that the plaintiff’s claim for equitable compensation was time-barred as it was in substantially the same form as a claim for breach of trust. Since all the claims were time-barred, the Court held that there is no point for the plaintiff to seek an account.

The judgment capped off a notable 2024 in the Court of Final Appeal during which members of Temple Chambers appeared in 10 of the 11 full civil appeals heard by the Court.

 (instructed by Iu, Lai & Li) appeared on behalf of the plaintiff.

 (instructed by Zhong Lun Law Firm LLP) appeared on behalf of the defendant.

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Lord Hoffmann NPJ on Limitation Periods for Constructive Trusts over Secret Profits – “…too much of this damned deeming”!

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