Wood v Commercial First Business Ltd; Business Mortgage Finance 4 plc v Pengelly

Mortgage – Fiduciary relationship – Secret commission – Company arranging mortgage on behalf of respondents – Appellant assignee of mortgage seeking possession of property – Respondents counterclaiming for rescission of mortgage – Whether fiduciary relationship between client and broker necessary pre-condition to grant of relief against payer of undisclosed commission – Whether fiduciary relationship existing – Whether payments being half-secret commissions – Appeals dismissed The two separate appeals raised common issues. The lender and the broker were the same, CFBL, which went into liquidation and was dissolved in December 2019. The various loans were assigned to third parties by way of securitisation. The assignees were the appellants in both cases. The respondent borrowers defaulted on the loans. In each case, the respondent sought rescission of the loan agreements and mortgages, on the grounds that CFBL had paid commissions to the broker without their knowledge or consent. The courts found in favour of both respondents as regards the circumstances in which a borrower was entitled to rescission of a loan contract and its accompanying mortgage or other security where the broker through whom the secured loan was arranged has received an undisclosed commission from the lender. Although the respondents succeeded on the issue of undisclosed commissions, in the first case it was held that, in order for relief to be granted against the party who paid the undisclosed commission, it was not necessary for a fiduciary relationship to exist between the client and the broker: [2019] EWHC 2205 (Ch). In the second case, the judge held that a fiduciary relationship was a necessary precondition to the grant of relief, including rescission, against the party who paid the commission. It was held in both cases that a fiduciary relationship existed between the broker and respondents respectively: [2020] EWHC 2002 (Ch); [2020] PLSCS 157. The appellant appealed raising issues: (i) whether a fiduciary relationship between the client and the broker was a necessary pre-condition to the grant of relief against the payer of the undisclosed commission; (ii) whether such a fiduciary relationship existed; and (iii) whether the commissions paid were half-secret commissions. Held: The appeals were dismissed. (1) The present cases fell within a broad and common set of relationships which involved a contractual or other legal duty to provide information or advice or recommendations. The precise scope of the duties of brokers would require examination by reference to the terms of their engagement. The question was simply whether the payee was under a duty to provide information, advice or recommendation on an impartial or disinterested basis. If the payee was under such a duty, the payment of bribes or secret commissions exposed the payer and the payee to the applicable civil remedies. No further enquiry as to the legal nature of their relationship was required. Where a party to a contract had paid a bribe or secret commission to the agent or advisor to the other party, the latter was entitled to rescission of the contract. Rescission was then, and remained, a remedy available both at law and in equity. Rescission was also available in a wider range of cases in equity than at law, but it clearly was available at law in the case of fraud, and bribery was treated as a species of fraud. The common law remedies of money had and received and damages were available against the third party payer of a bribe or secret commission, and rescission of a transaction with the third party was available as of right, subject to making counter-restitution. None of that depended on establishing that the third party was an accessory to a breach of fiduciary duty by the payee. (2) In cases such as the present where an “agent” providing advice, information or recommendations had received or been offered a bribe or secret commission, the question for the court was whether the agent owed a duty to be impartial and to give disinterested advice, information or recommendations. Courts had, principally in recent cases, characterised that as a fiduciary duty of loyalty. But that did not mean that in such cases courts needed to involve themselves in complex analyses of the nature of a fiduciary relationship or the duties which might be associated with a fiduciary relationship. It would be better to avoid doing so. The judges in the present cases were unquestionably correct to hold that, on the basis of the broker’s terms and conditions and the findings of fact at first instance, the broker owed duties which engaged the law applicable to bribes and secret commissions. It was under a duty to make a disinterested selection of mortgage product to put to its client in each case. To the extent that it was necessary, they were also correct to hold that the broker owed a fiduciary duty of loyalty to the respondents in the performance of its duties. It mattered not whether that duty was characterised as fiduciary. The terms of their agreements were inconsistent with the appellant’s submission that the broker’s only duty was to pick one mortgage provider and product without regard to the availability of better products. It was the broker that had access to a panel of lenders and undertook to provide the appropriate product to meet the client’s individual circumstances and needs. That necessarily involved judgment and choice on the part of the broker. Moreover, the broker had express authority to negotiate with lenders, and could thereby seek to improve the terms available to the client. It was difficult to see that the grant of that authority had any other purpose. The case advanced for the appellants was also irreconcilable with the findings of fact by the trial judges who were clearly right in their conclusions as to the duties owed by the broker to the respondents. (3) The broker’s terms of business imposed an unqualified obligation on the broker to inform the borrower, before a mortgage was taken out, of the amount of the fee. As the commissions in both cases exceeded £250, the exact amount had to be disclosed. Without such disclosure, the borrowers were not on notice that any commission might be paid. The only conclusion from the absence of any notification as required was that no commission was to be paid. The undisclosed commissions were therefore secret, not half-secret, commissions.  David Lord QC and Stuart Cutting (instructed by Moore Barlow LLP) appeared for the appellants; Stephen Meachem (of Law Tribe) appeared for the respondent in the first appeal; William Hopkin (instructed by Coodes LLP, of St Austell) appeared for the respondent in the second appeal. Eileen O’Grady, barrister Click here to read a transcript of Wood v Commercial First Business Ltd and others; Business Mortgage Finance 4 plc v Pengelly