The Supreme Court in FHR European Ventures LLP and others (FHR) v Cedar Capital Partners LLC (Cedar) (16 July 2014) has overruled the Court of Appeal decision in Sinclair Investments Ltd v Versailles Finance Ltd and the long standing cases of Tyrell v Bank of London (1862) and Lister & Co v Stubbs (1890) in a landmark ruling in holding that a bribe or secret commission received  by an agent is held on constructive trust for the principal and does not simply give rise to a claim for equitable compensation. 

The claim centred around an “Exclusive Brokerage Agreement” between Cedar (a consultancy to the hotel industry) and the seller of the issued share capital of the Monte Carlo Grand Hotel SAM, which provided for the payment to Cedar of a €10 million fee following a successful conclusion of the sale and purchase of the share capital. FHR was the joint venture purchase vehicle for the claimant purchasers, who had engaged Cedar to provide consultancy services and who had acted as the claimants’ agent in negotiating the purchase. Despite the fiduciary duties owed by Cedar to FHR, it did not declare the €10 million fee and proceedings were issued, nearly five years later to determine whether there had been proper disclosure by Cedar of the Exclusive Brokerage Agreement.

At first instance, the Court held that Cedar was liable for breach of its fiduciary duty for having failed to obtain the claimants’ fully informed consent in respect of the €10 million, and ordered Cedar to pay that sum to the claimants, but  refused to grant the claimants a proprietary remedy in respect of the monies.  The claimants appealed to the Court of Appeal, who made a declaration that Cedar received the €10 million fee on constructive trust for the claimants absolutely. Cedar then appealed to the Supreme Court.

The Supreme Court upheld the Court of Appeal in finding that a bribe or secret commission received by the agent can be treated as being the property of the principal and not merely as giving rise to a claim for equitable compensation.

This has very significant ramifications in fraud and asset tracing claims – on the basis of a proprietary claim, if the agent become insolvent, the claim would rank in priority over other creditors and if the bribe/secret commission has been dissipated to others, the principal can make claim against the recipient by tracing into the proceeds (where the recipient is not a bona fide purchase for value without notice).

This settles a long running legal question which is likely to be of huge importance to victims of a bribe or secret commission.