Legal notes Who owns any secret commission or bribe that is paid to an agent? Allyson Colby answers in light of a recent Supreme Court decision
Fiduciary obligations may arise in a wide range of business relationships. A fiduciary is someone who has undertaken to act for or on behalf of another in circumstances that give rise to a relationship of trust and confidence. The relationship of principal and agent creates such a relationship. An agent must act in good faith and must not use the position in a way that is adverse to the interests of the principal. This means that the agent cannot accept secret commissions or bribes, or use the position to make profits without the fully informed consent of the principal.
This is all well and good, but what are the remedies when things go awry? Who owns any secret commission or bribe that is paid? Does the agent hold it on trust for the principal? Or does the principal have a personal claim for a sum equal to the value of the secret commission or bribe? The answer is hugely important in practical terms.
If a bribe or commission is held on trust, the principal has a proprietary claim to it. This means that the principal may be able to trace the proceeds into other assets (which may have increased in value), or follow them into the hands of knowing recipients. If the agent were to become insolvent, the principal would also have priority over the agent’s unsecured creditors. If, on the other hand, the claim is not a proprietary one, it must be brought within a strict statutory limitation period and, if the agent were to become insolvent, the principal would have to claim alongside other unsecured creditors.
Controversy
FHR European Ventures LLP v Mankarious [2014] UKSC 45; [2014] PLSCS 213 provides an answer to this question, which, to quote Lord Justice Pill ([2013] EWCA Civ 17; [2013] 2 EGLR 169), has roused “passions of a force uncommon in the legal world” [55].
The case 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 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.
It was already established law that the beneficiary of a fiduciary duty is entitled to a proprietary remedy if a fiduciary acquires an asset or money that is, or has been, beneficially the property of the beneficiary, or acquires an asset or money by taking advantage of an opportunity or right that was properly that of the beneficiary. However, the High Court followed a line of authorities stretching back to the House of Lords’ decision in Tyrrell v Bank of London (1862) 10 HL Cas 26, which was followed by the Court of Appeal most recently in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347. As a result, the trial judge ruled that the buyer was entitled to a personal, and not a proprietary, remedy.
The Court of Appeal managed to distinguish Sinclair and overturned the first instance decision. It held that the buyer was entitled to seek a proprietary remedy because the agent had diverted to itself an opportunity that it should have procured for its principal. Which of these decisions was correct?
Policy and practicality
The agent tried to persuade the Supreme Court that secret commissions are not benefits that belong to an agent’s principal since they are not, and could not be, intended for the principal and are, rightly or wrongly, the property of the agent. It also argued that it would prejudice any unsecured creditors, were the court to rule that agents hold such payments on trust for their principals.
The Supreme Court thought the agent’s arguments unattractive. The authorities were not clear or consistent and it was difficult to reconcile them. Indeed, if the cases cited to the court had all been correctly decided, the law was close to incoherent in this area.
There were good policy reasons for deciding that an agent holds secret commissions acquired as a result of his agency, and in breach of his fiduciary duties, on trust for his principal – and other jurisdictions had already done so. Secret commissions are objectionable because they tend to undermine trust in the commercial world. 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 secret commission or bribe.
Lord Neuberger also noted that secret commissions paid to an agent will often reduce the profit made by the agent’s principal and observed that they could, as a result, fairly be said to be the principal’s property. Furthermore, agents should not accept such payments. Therefore, the amounts received should not be available to their creditors at all.
Landmark decision
The stage was set. The Supreme Court ruled that fiduciaries hold secret commissions obtained in breach of their fiduciary duties on trust for their principals. In so doing, it disapproved Tyrrell and overruled subsequent cases that it regarded as wrongly decided, thereby ending 200 years of controversy and simplifying the law. Interestingly, it was Lord Neuberger who delivered the unanimous decision of a panel of seven members of the Supreme Court, overruling the judgment of the Court of Appeal, which he had delivered three years previously, in Sinclair.
The Supreme Court’s honesty is refreshing. It chose not to sidestep the difficulties created by Tyrrell and Sinclair (as the Court of Appeal had been required to do because it was bound to follow these decisions), and made no secret of the fact that it was basing its judgment on policy, principle and practicality. The ruling strengthens the sanctions available where agents obtain benefits in breach of their fiduciary duties and may open the door to claims that might otherwise not have been possible, were it not for this decision.
Allyson Colby is a property law consultant
