Mortgage – Rescission – Secret commission – Company arranging mortgage on behalf of appellant – Respondent assignee of mortgage seeking possession of property – Appellant counterclaiming for rescission of mortgage – County court ruling in favour of respondent – Appellant appealing – Whether company acting as appellant’s agent – Whether mortgagee paying secret commission to company – Whether respondent having accessory liability as assignee for breach of fiduciary duty by company – Whether contract unfair under consumer protection legislation – Appeal allowed
The appellant was the mortgagor and owner of The Barn at Middle Amble, Wadebridge, Cornwall from which he operated a working farm. In 2005, the appellant wanted to refinance two outstanding loans and raise additional capital secured by a mortgage over the property.
The appellant approached UKMFS to help him to secure a loan. He accepted its standard terms and conditions which stated, among other things, that UKMFS would act on the appellant’s behalf and that, in relation to fees they might receive from the lenders with whom they placed the mortgages, if the amount was less than £250 the appellant would be notified and if it exceeded £250 he would be told the exact amount.
A mortgage was arranged with CFBL and an advance of some £81,000 agreed, paying off the two loans and providing the appellant with some £30,000 in capital. UKMFS received a commission from both the appellant and CFBL, which relied on UKMFS to communicate that fact to the appellant. UKMFS did not do so.
The loan fell substantially into arrears and the respondent, as assignee of the mortgage, sought possession of the property. By his defence and counterclaim, the appellant sought to have the mortgage rescinded because either: (i) CFBL had paid, and the appellant’s fiduciary had received, a secret commission; or (ii) the contract had been unfair under the consumer protection legislation.
The judge concluded that there was no fiduciary relationship between the appellant and UKMFS. However, if that was wrong, the case was one of a “half-secret” commission so that the court had a discretion whether to rescind: Hurstanger Ltd v Wilson [2007] EWCA Civ 299.
The judge determined the claim in favour of the respondent and dismissed the appellant’s defence and counterclaim. The appellant appealed.
Held: The appeal was allowed.
(1) A “half-secret” commission was a secret commission or bribe paid to an agent where there had been partial, but not full, disclosure to the agent’s principal. Where there had been full disclosure, and the principal had provided informed consent, there was no bribe or secret commission at all. A half-secret commission appeared to seek to describe that variety of cases falling short of informed consent, but where some level of disclosure had occurred.
(2) The term “fiduciary relationship” described a relationship that entailed particular obligations and responsibilities because of the nature of trust and confidence that existed between the fiduciary (the person who owed the duties) and the person to whom those duties were owed (the principal). The relationship was therefore one which gave the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who was accordingly vulnerable to abuse by the fiduciary of his position. Where the fiduciary received a gain from a third party, that gain was often referred to as a secret commission or bribe. So far as the fiduciary was concerned, a secret commission was indistinguishable from other forms of gain that could (but should not) be derived from a fiduciary position: Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 and Bristol and West Building Society v Mothew [1998] Ch 1; [1996] EGCS 136 applied.
(3) The liability of a third party was contingent upon there being a breach of fiduciary duty on the part of the fiduciary to whom the secret commission or bribe was made. Further, it was well established that a principal who discovered that his agent in a transaction had obtained or arranged to obtain a bribe or secret commission from the other party to the transaction was entitled, in addition to other remedies, to elect to rescind the transaction ab initio or, if it was too late to rescind, to bring it to an end for the future. The remedy was not confined to cases where the agent had taken a bribe or secret commission in the strictest sense. It was available whenever, without his principal’s knowledge and consent, the agent had put himself in a position where his interest and duty might conflict: Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256; [1988] EGCS 114 followed.
(4) In the present case, the relationship between the appellant and UKMFS had been clearly one of agency and was fiduciary in nature giving rise to fiduciary duties. The distinguishing obligation of a fiduciary was the obligation of loyalty which would be undermined if the fiduciary was subject to other calls on their loyalty. Without informed consent, a fiduciary was not to profit from its position and had to account for it to the principal.
The effect of the terms of the agency agreement had been to attenuate the fiduciary duties owed by UKMFS to the appellant but not to eliminate them altogether. Those attenuated obligations had to be strictly complied with, and they had not been. Accordingly, UKMFS was in breach of its fiduciary duty.
(5) Although the counterclaim was not against UKMFS, accessory liability attached to the respondent. Applying the three-stage test set out in Industries & General Mortgage Co Ltd v Lewis [1949] 2 All ER 573, the bribe or secret commission was paid to the fiduciary, the third party knew the capacity in which the recipient of the bribe or secret commission was acting and the third party failed to disclose the bribe or secret commission to the principal. Accordingly, the appellant’s counterclaim succeeded.
The breach of fiduciary duty committed by UKMFS had been both extremely serious and resulted in a non-disclosure of the secret commission received by UKMFS. Rescission was a remedy to which the appellant was entitled, provided he was able to make counter-restitution.
(6) No point of law regarding section 140A of the Consumer Credit Act 1974 had arisen before the judge who was concerned with the essentially factual question of whether the mortgage was unfair within the 1974 Act. The judge’s reasons for concluding that no unfairness had arisen were unimpeachable.
William Hopkin (instructed by Coodes Solicitors, of Cornwall) appeared for the appellant; Stuart Cutting (instructed by Moore Barlow LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Pengelly v Business Mortgage Finance 4 plc
