On 16 July 2014, the Supreme Court provided clarity on the nature
of a principal’s entitlement to recovery of a secret commission or bribe
received by an agent. The court ruled that when an agent acquires a benefit as
a result of his fiduciary position, including a secret commission or bribe, he
is to be treated as having acquired the benefit on behalf of his principal and
so holds it on trust for the principal. The ruling is significant in the
context of insolvency, as the effect of the decision is to give a principal a
preferential claim over the assets of his agent, as against an unsecured
creditor. It also permits the principal to trace the bribe into the hands of
others (where they are not bona fide purchasers), which can be crucial
where the agent has dissipated his assets. This ruling confirms a principle
which has, to date, been treated inconsistently by the courts since the
nineteenth century.
Facts of the case : In
December 2004, FHR European Ventures LLP (FHR) purchased the issued share
capital of the Monte Carlo Grand Hotel SAM from Monte Carlo Grand Hotel Ltd (the
Seller). Cedar Capital Partners LLC (Cedar) were consultants who acted as FHR’s
agent in negotiating the purchase of the hotel. However, Cedar had also entered
into an “Exclusive Brokerage Agreement” (Agreement) with the Seller, under which
Cedar received a €10m fee on conclusion of the sale and purchase of the hotel in
or around January 2005.
In November 2009, the claimants brought proceedings to recover the
€10m fee from Cedar on the basis that they had failed to disclose the Agreement
to the claimants and breached their fiduciary duties. The claim was successful
at first instance, but the judge refused to give the claimants a proprietary
remedy in respect of the monies (which would otherwise have put the claimants in
a favorable position over unsecured creditors in the event of insolvency).
Instead, FHR was held to have a personal claim against the agent.
The Court of Appeal granted the claimants’ appeal on this point
and made a declaration that Cedar received the €10m fee on constructive trust
for the claimants and so was entitled to a proprietary remedy. This decision
has now been upheld by the Supreme Court.
The argument focused on the limits of the application of a rule of
equity that an agent who acquires a benefit as a result of his fiduciary
position or pursuant to an opportunity resulting from his fiduciary position, is
to be treated as holding that benefit on behalf of, and so on trust for, the
principal. If the rule applied in the context of a bribe or secret commission,
it would give the principal a proprietary claim to the bribe as well as a
personal claim against the agent; if not, the principal would have only a
personal claim against the agent. Cedar argued that the claimants should not be
entitled to a proprietary remedy in such a case, on the basis that a bribe or
secret commission was always intended to be made to the agent, not his
principal; it was never the principal’s property. Accordingly, it would be
wrong to assume a constructive trust and there should be an exception to the
equitable rule to that extent. FHR argued that the equitable rule should apply,
on the basis that equity does not permit an agent to rely on their own wrong to
justify retaining a benefit received as a result. Lord Neuberger, who
delivered the judgment, reviewed the conflicting authorities and concluded that
it was not possible to decide the case on the basis of clear legal authority and
so it was necessary to consider the matter from the perspective of principle and
practicality. He considered Cedar’s argument to be the more complicated to
justify and also unattractive, given that in a situation where the agent
receives a bribe or secret commission from a third party, there would be a
strong possibility that that payment would disadvantage the principal. Looking
at the facts of the case, Lord Neuberger considered that had the Sellers not
paid the €10m to Cedar, it may have accepted a reduced price to reflect the fact
it did not have to pay the large fee to the consultant. Furthermore, given the
heightened awareness and concern about bribery, the Supreme Court said that it
expected “the law to be particularly stringent in relation to a claim
against an agent who has received a bribe or secret commission” (at
paragraph 42).
FHR’s arguments had the merit of simplicity and were consistent
with the fundamental principles of the law of agency. They were also consistent
with the position in other common law jurisdictions, namely Australia, New
Zealand, Singapore, Canada and the US. It also seemed curious that if Cedar’s
arguments were preferred, this could have the effect that a principal whose
agent wrongly accepted a bribe would be worse off (in terms of recovery) than
where the principal had obtained a benefit “in far less opprobrious
circumstances” (at paragraph 41).
Accordingly, the Supreme Court favored the claimant’s argument,
concluding that “there is no plainly right answer, and, accordingly, in the
absence of any other good reason, it would seem right to opt for the simple
answer” (at paragraph 35). This decision provides a welcome clarification
of the position of the status of bribes and secret commissions paid to agents.
It provides a departure from the jurisprudential differentiation between
different types of benefits that an agent may receive in breach of his duties
that had occupied the minds of lawyers and their textbooks for many years. The
judgment is likely to have a significant impact on cases where the agent in
question has dissipated his assets or has become insolvent, such that the
principal may not otherwise have been able to (1) recover the full amount of the
bribe or secret commission from the remaining assets when other creditors are
taken into account and/or (2) trace the funds into the hands of non-bona
fide purchasers. Of course, where a principal seeks to recover what is, in
effect, a bribe paid to the agent, this may create other issues for the
principal to grapple with, not least the money laundering provisions in the
proceeds of crime legislation. If not carefully considered and complied with,
the principal may find himself committing a criminal offence by recovering
“criminal property”.
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