Does an agent who accepts a bribe or secret commission hold it on trust for his principal, or does his principal have a claim for equitable compensation instead, in a sum equal to the value of the bribe or commission? The Supreme Court swept away 200 years of judicial debate in FHR European Ventures LLP v Mankarious [2014] UKSC 45; [2014] PLSCS 213 and has, at long last, provided us with an answer that clarifies and simplifies the law.
The judgment is very important in practical terms. If a bribe or commission is held on trust, the principal has a proprietary claim to it. This means that, if the agent were to become insolvent, the principal would have priority over the agent’s unsecured creditors. The principal may also be able to trace the proceeds of a bribe or commission into other assets, or follow them into the hands of knowing recipients. If, on the other hand, the principal has a claim for equitable compensation, the claim is not a proprietary one, and, if the agent were to become insolvent, the principal would have to claim alongside other unsecured creditors.
The litigation concerned the sale of a hotel in Monte Carlo. The buyer paid €211.5m to acquire it, without appreciating that its agent had entered into a separate arrangement with the seller, as a result of which the seller paid the agent a commission in the sum of €10m for achieving the sale. The buyer brought proceedings to recover the €10m fee as a secret commission that the agent had earned in breach of its fiduciary duties. Its case was that, if the seller was prepared to sell for €211.5m, on the basis that it was paying a secret commission of €10m, it must have been quite likely that, in the absence of such commission, the seller would have been prepared to sell for less than €211.5m – and possibly for only €201.5m.
The Supreme Court reviewed the authorities, which were inconsistent with each other, before turning to arguments based on policy, principle and practicality. It noted that an agent owes a fiduciary duty of undivided loyalty to his principal, unless the principal gives informed consent to some less demanding standard of duty. Consequently, the principal is entitled to the benefit of his agent’s acts in the course of his agency.
The court dismissed arguments that an agent does not hold a bribe or commission on trust for his principal because he could not have acquired it on behalf of his principal and that it would prejudice the agent’s unsecured creditors, were the court to rule that agents hold bribes or secret commissions on trust for their principals. The bribe or commission will often have reduced the benefit obtained by the agent’s principal. Consequently, it can fairly be said to belong to the principal and should not be in the agent’s estate at all.
Bribes and secret commissions are objectionable because they tend to undermine trust in the commercial world, and concern about bribery and corruption has never been greater than it is now. Therefore, one would expect the law to be particularly stringent where an agent has received a bribe or secret commission – and there were good policy reasons for deciding that an agent holds any benefits acquired as a result of his agency, and in breach of his fiduciary duties, on trust for his principal.
Allyson Colby is a property law consultant
