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UK Supreme Court holds that secret commission received by an agent is held by that agent on trust for his principal

UK Supreme Court holds that secret commission received by an agent is held by that agent on trust for his principal

FHR European Ventures LLP and others v Cedar Capital Partners LLC

Before: Lord Neuberger, President, Lord Mance, Lord Sumption, Lord Carnwath, Lord Toulson, Lord Hodge, Lord Collins

July 16, 2014

Reported by Linda Awuor & Diana O. Kerubo

Brief Facts

On 22 December 2004, FHR European Ventures LLP purchased the issued share capital of Monte Carlo Grand Hotel SAM from Monte Carlo Grand Hotel Ltd (“the Seller”) for €211.5m. The purchase was a joint venture between the claimants, for whom FHR was the vehicle. Cedar Capital Partners LLC provided consultancy services to the hotel industry, and it had acted as the claimants’ agent in negotiating the purchase. Cedar accordingly owed fiduciary duties to the claimants. Cedar had also entered into an “Exclusive Brokerage Agreement” with the Seller, which provided for the payment to Cedar of a €10m fee following a successful conclusion of the sale and purchase of the issued share capital of Monte Carlo Grand Hotel SAM. The Seller paid Cedar €10m on or about 7 January 2005.

On 23 November 2009 the claimants began proceedings for recovery of the sum of €10m from Cedar. The main issue at trial was whether Cedar had made proper disclosure to the claimants of the Exclusive Brokerage Agreement. It was found against Cedar on that issue, and made a declaration of liability for breach of fiduciary duty on the part of Cedar for having failed to obtain the claimants’ fully informed consent in respect of the €10m, and ordered Cedar to pay that sum to the claimants. However, a proprietary remedy was not granted to the claimants in respect of the monies.

The claimants successfully appealed to the Court of Appeal, who made a declaration that Cedar received the €10m fee on constructive trust for the claimants absolutely. Cedar appealed to the Supreme Court.

Issue:

  1. Whether a bribe or secret commission received by an agent is held by the agent on trust for his principal, or whether the principal merely has a claim for equitable compensation in a sum equal to the value of the bribe or commission.

Agency Law-principal-agent relationship-fiduciary duty-duty to disclose secret commission-whether a bribe or secret commission received by an agent is held by the agent on trust for his principal, or whether the principal merely has a claim for equitable compensation in a sum equal to the value of the bribe or commission.

Held:

  1. The three principles taken from the classic summary of the law in [West Building Society v Mothew [1998] Ch 1, 18] were not in doubt:
    1. An agent owes a fiduciary duty to his principal because he is “someone who has undertaken to act for or on behalf of [his principal] in a particular matter in circumstances which give rise to a relationship of trust and confidence;
    2. as a result, an agent “must not make a profit out of his trust” and “must not place himself in a position in which his duty and his interest may conflict; and
    3. a fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other.
  2. Another established principle, which applied where an agent received a benefit in breach of his fiduciary duty, was that the agent was obliged to account to the principal for such a benefit, and to pay, in effect, a sum equal to the profit by way of equitable compensation.The principal’s right to seek an account undoubtedly gave him a right to equitable compensation in respect of the bribe or secret commission, which was the quantum of that bribe or commission (subject to any permissible deduction in favour of the agent – eg for expenses incurred). That was because where an agent acquired a benefit in breach of his fiduciary duty, the relief accorded by equity was, primarily restitutionary or restorative rather than compensatory. The agent’s duty to account for the bribe or secret commission represented a personal remedy for the principal against the agent. However, the relevant point was that, in some cases where an agent acquired a benefit which came to his notice as a result of his fiduciary position, or pursuant to an opportunity which resulted from his fiduciary position, the equitable rule (“the Rule”) was that he was to be treated as having acquired the benefit on behalf of his principal, so that it was beneficially owned by the principal. In cases where the rule applied, the principal had a proprietary remedy in addition to his personal remedy against the agent, and the principal could elect between the two remedies.
  3. What was in dispute in the instant case was the extent to which the Rule applied where the benefit was a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal.On the one hand, the appellant contended, that the Rule should not have applied to a bribe or secret commission paid to an agent, because it was not a benefit which could properly be said to be the property of the principal.On the other hand, it was suggested by the respondent, that the Rule did apply to bribes or secret commissions received by an agent, because, in any case where an agent received a benefit, which was, or resulted from, a breach of the fiduciary duty owed to his principal, the agent held the benefit on trust for the principal.
  4. It was not possible to identify any plainly right or plainly wrong answer to the issue of the extent of the Rule, as a matter of pure legal authority.The respondents’ formulation of the Rule had the merit of simplicity: any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty was held on trust for the principal. On the other hand, the appellant’s position was more likely to result in uncertainty. Wider policy considerations also supported the respondents’ case that bribes and secret commissions received by an agent should be treated as the property of his principal, rather than merely giving rise to a claim for equitable compensation. Secret commissions were also objectionable as they inevitably undermined trust in the commercial world. Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who had received a bribe or secret commission.
  5. The argument by the respondents was that the Rule would prejudice the agent’s unsecured creditors, as it would serve to reduce the estate of the agent if he became insolvent. While the point had considerable force in some contexts, it had limited force in the context of a bribe or secret commission. In the first place, the proceeds of a bribe or secret commission consisted of property which should not have been in the agent’s estate at all Secondly, the bribe or commission would very often have reduced the benefit from the relevant transaction which the principal would have obtained, and therefore could fairly be said to be his property. A principal whose agent had obtained a bribe or secret commission should have been able to trace the proceeds of the bribe or commission into other assets and to follow them into the hands of knowing recipients.
  6. The considerations of practicality and principle supported the respondents’ case, namely that a bribe or secret commission accepted by an agent was held on trust for his principal.The position was perhaps rather less clear when one examined the decided cases. Indeed, taken as a whole, the authorities favoured the respondents’ case.
  7. If one concentrated on the issue of bribes or secret commissions paid to an agent or other fiduciary, the cases, with the exception of Tyrell [Tyrrell v Bank of London(1862)10 HL Cas 26], were consistently in favour of such payments being held on trust for the principal or other beneficiary until the decision in Heiron [Metropolitan Bank v Heiron (1880)5 Ex D 319] which was then followed inLister [Lister & Co v Stubbs (1890)45 Ch D 1].
  8. As for the domestic cases subsequent to Lister, they were all explicable on the basis that it was either conceded or decided that the reasoning in Lister was binding. Further, even after Lister, cases were being decided in which it seemed to have been accepted or decided that where an agent or other fiduciary had a duty to account for a benefit obtained in breach of his fiduciary duty, the principal was entitled to a proprietary interest in the benefit. The decision in Tyrrell ought not stand in the way of the conclusion that the law took a wrong turn in Heiron and Lister, and that those decisions, and any subsequent decisions, at least in so far as they relied on or followed Heiron and Lister, should be treated as overruled.

Appeal dismissed.

 

 Relevance to Kenya

This case influences the principal- agent relationship in relation to any secret commission or bribe acquired by the agent pursuant to an opportunity which results from his fiduciary position.

The established rule has been that that the agent in such position was required to account to the principal for such benefit and to pay a sum equal to the profit by way of equitable compensation.

This case however saw the shift in reasoning where the court held that a bribe or secret commission accepted by an agent is held on trust for his principal and therefore the principal has a proprietary claim to it.

According to the court, if the bribe or commission is held on trust, the principal has a proprietary claim to it, whereas if the principal merely has a claim for equitable compensation, the claim is not proprietary.

The distinction according to the court is significant for two main reasons:

First, if the agent becomes insolvent, a proprietary claim would effectively give the principal priority over the agent’s unsecured creditors, whereas the principal would rank pari passu, i.e equally, with other unsecured creditors if he only has a claim for compensation.

Secondly, if the principal has a proprietary claim to the bribe or commission, he can trace and follow it in equity,whereas a principal with a right only to equitable compensation would have no such equitable right to trace or follow.

Anti-corruption and Economic Crimes Act

Section 38(1) defines an agent as any person who, in any capacity, and whether in the public or private sector, is employed by or acts for or on behalf of another person. It also defines a principal as a person whether in the public or private sector, who employs an agent or for whom or on whose behalf an agent acts.

Section 39-Bribery involving agents

1)     This section applies with respect to a benefit that is an inducement or reward for, or otherwise on account of, an agent—

  1. doing or not doing something in relation to the affairs or business of the agent’s principal; or
  2. showing or not showing favour or disfavour to anything, including to any person or proposal, in relation to the affairs or business of the agent’s principal.

2)     For the purposes of subsection (1)(b), a benefit, the receipt or expectation of which would tend to influence an agent to show favour or disfavour, shall be deemed to be an inducement or reward for showing such favour or disfavour.

3)     A person is guilty of an offence if the person—

  1. corruptly receives or solicits, or corruptly agrees to receive or solicit, benefit to which this section applies; or
  2. corruptly gives or offers, or corruptly agrees to give or offer, a benefit to which this section applies

Section 42-Conflicts of interest

1)     If an agent has a direct or indirect private interest in a decision that his principal is to make the agent is guilty of an offence if—

  1. the agent knows or has reason to believe that the principal is unaware of the interest and the agent fails to disclose the interest; and
  2. the agent votes or participates in the proceedings of his principal in relation to the decision.

Compensation and Recovery of Improper Benefits

Section 51-Liability for compensation

A person who does anything that constitutes corruption or economic crime is

liable to anyone who suffers a loss as a result for an amount that would be full

compensation for the loss suffered.

Section 52. Liability for improper benefits

A person who receives a benefit the receipt of which would constitute an offence under section 39, 40 or 43 is liable, for the value of the benefit, to them following persons—

a)    if the receipt constitutes an offence under section 39, to the agent’s principal;

b)    …

c)    …

This case may assist in clarifying the principal agent relationship in so far as secret commission or bribes are concerned.

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