A public official receives a bribe to award a contract. Does the bribe “belong” to the official or to the state that he or she represents? The issue (which is of much wider application than bribery of public officials) is controversial and unclear in English law, and the current position is at odds with other common law jurisdictions such as Australia. And the answer to the question can matter a great deal to the success of a claim.

The common law concepts in issue are complex and involve (often unnecessarily) complicated language. This note will attempt, as far as possible, to avoid the use of technical terms.  It is also concerned only with claims against the bribed officials. Other claims are, of course, available against bribe-payers, including claims for the amount of the bribes or losses suffered, and for the setting aside of contracts obtained by bribery.

Where an official steals assets, for example by arranging for the transfer of public funds to his or her own accounts, the English position is clear. The official will be the legal owner of the funds, but those funds will be held by the official “on trust” for the state. The state has what is known as a “proprietary claim” to the funds.

The existence of a proprietary claim can be important for a number of reasons. First, if the official becomes insolvent, all of the funds can be claimed by the state in preference to the claims of other (innocent) creditors. Secondly, if the funds are invested in assets that increase in value, the state will be entitled to recover the entirety of those assets, therefore taking the benefit of the increase in value. In the absence of a proprietary claim, this would be more difficult, if available at all, because the increase in value is not itself usually a result of any wrongdoing. Thirdly, proprietary claims may bring more effective mechanisms to trace and recover funds that have been paid away. Fourthly, a claim by the state may be subject to less onerous limitation rules. And finally, the state may be able to obtain better rates of interest on sums awarded to it. That can make a difference when bribes are substantial and uncovered only after a significant period of time.

But what is the position in relation to a bribe? There is no doubt that the bribed official must pay the amount of the bribe to the State. But is that a purely personal claim, or is it proprietary?

Before examining the position, it is worth noting, because it is relevant to some of the analysis in the cases referred to below, that in common law systems senior public officials will typically owe wide-ranging duties to the state that they represent. These are known as “fiduciary duties” and may include a duty of loyalty and fidelity; a duty to act in good faith and in the best interests of the state; a duty not to put themselves in a position where their personal interest conflicted with their duties and responsibilities; a duty not to prefer their own interests or the interests of others to the interests of the state, or to make any undisclosed profit from their position; as well as a duty not to solicit or accept bribes. Similar duties are owed, for example, by company directors, as well as others in a position of trust. Breach of fiduciary duties can give rise to claims.

Lister v Stubbs: “there is no proprietary claim to a bribe”

The starting point, at least for the purposes of this note, is the nineteenth century Court of Appeal case of Lister v Stubbs[1]. Here, Stubbs was an employee of Lister and accepted bribes from a supplier. Those bribes had been invested in a property. Lister claimed a proprietary interest in that property. The Court of Appeal rejected this. The employee only had to pay over the amount of the bribes. The effect was to distinguish between the treatment of stolen assets, which were held in trust, and bribes, which gave rise to a claim only for the value of the bribe (or any loss suffered as a result of the bribery).

Attorney General of Hong Kong v Reid:  “Oh yes there is”

Lister v Stubbs survived for over a century. But in 1994, the Privy Council, hearing a case on appeal from New Zealand, decided that it has been wrongly decided. The case is Attorney General of Hong Kong v Reid[2]. Reid was a corrupt prosecutor. He took bribes from criminals to obstruct their prosecutions. However, he invested those bribes wisely, buying land that increased almost four-fold in value.

The Hong Kong Government successfully claimed that Reid held all of the land on trust for it, the Court famously stating that “Bribery is an evil practice which threatens the foundation of civilised society”, and equating bribes with stolen assets. This meant that the Government recovered the bribes and the profits made from investing those bribes. The reasoning developed as follows:

  • The bribe belongs to the official
  • But it is unconscionable for the official to receive, and keep, a benefit in breach of the duties owed to a state
  • As a result, the official must pay the bribe to the state
  • The bribe should have been paid, on receipt
  • Equity considers “as done that which ought to be done
  • On receipt, the bribe was therefore held by Reid on trust for the state

Technically, in English law, the older Court of Appeal decision of Lister v Stubbs is of greater weight, unless ultimately overruled by the Supreme Court. But since the Reid decision, it has typically been assumed that Lister v Stubbs will be over-ruled in due course. This is despite some obvious conceptual difficulties with the reasoning in Reid. In particular, the analysis requires the bribe to be treated as property which ought to be paid over to the state. But it is unclear why this should be; it is no part of the official’s duties to take a bribe. 

Sinclair Investments v Versailles Trade Finance: “Oh no there isn’t”

But in 2011, the Court of Appeal emphatically upheld the decision in Lister v Stubbs. The case is Sinclair Investments v Versailles Trade Finance[3]. To add to the confusion that follows, it is not a bribery case, but the relevant funds were treated as equivalent to bribes.

A company director had made profits approaching £30 million from the sale of his own shares. But those shares were inflated in value as a result of breaches of the fiduciary duties that he owed to the company. He was sued by the company. If Lister v Stubbs was applied, there was no proprietary claim to the profits. If Reid was applied, a proprietary claim existed and the company could claim all of the profits.

The Court applied Lister v Stubbs. The profits had been obtained in breach of the duties owed by the director to the company. However, it was decided that this was not enough to give rise to a proprietary claim.  That claim would exist only if the director had stolen assets or the director had acquired the assets by diverting a business opportunity belonging to the company. There was a distinction to be drawn between misuse of property and abuse of position.

In the bribery context, the reasoning means that a state could claim the amount of the bribe from a corrupt official, but could not claim profits from the favourable investment of that bribe, even if those profits could not have been obtained unless the bribe had been received. The rationale is that there is a fundamental distinction between (i) an official enriching himself by depriving a state of an asset, and (ii) an official enriching himself by doing a wrong to a state.  The difference is that the former case involves pre-existing property rights, and those are necessary to trigger a proprietary claim. In addition, it was considered that Lister v Stubbs gave insufficient weight to the potentially unfair consequences to other creditors if the defendant was insolvent.

Interestingly, and arguably in a departure from principle, the Court noted that the absence of a proprietary claim might be addressed by adjusting the rules of how compensation is assessed for a breach of fiduciary duty. This, it was said, would not conflict with the principles identified above, would allow breaches of duty to be dealt with adequately, and would not jeopardise the legitimate interests of other creditors.

Cadogan Petroleum plc and others v Tolley and others: “definitely not”

The issue was then considered specifically in relation to a bribe in Cadogan Petroleum plc and others v Tolley and others[4]. The Claimants were companies involved in gas exploration and exploitation. One of the defendants was the former chief operating officer of the Claimants.

The Claimants alleged that the COO had received bribes from companies with whom the Claimants had acquired oil drilling equipment. Contract prices had been inflated, and the sellers had shared with the COO, as a reward, part of the difference between market value and the higher contract price. The Claimants made proprietary claims to those bribes. The Judge decided, applying Sinclair, that there was no proprietary interest in a bribe, unless it was the property of the company or was obtained by taking advantage of an opportunity or right which properly belonged to the company. In doing so, he specifically rejected the argument that, in fact, the COO had taken advantage of an opportunity belonging to the company, which was said to have arisen because the company had lost the opportunity to reduce what it had paid under the contracts by at least the amount of the bribes.

In rejecting this argument, the Judge accepted that proprietary claims could be made as a result of the diversion of business opportunities, as the Judges in Sinclair had noted. However, he rejected the suggestion that a bribe could be viewed as the diversion of an opportunity to obtain a reduced price. His view was that a bribe was something obtained as a result of wrongful behaviour, which was quite different than something obtained by a director depriving the company of a business opportunity.  

FHR European Ventures LLP v Mankarious: “But sometimes there can be”

But confusion has been reintroduced by the Court of Appeal in FHR European Ventures LLP v Mankarious[5]. It is very difficult, adequately, to reconcile this decision with Sinclair.

Hotel owners engaged an agent to sell a hotel. That agent was also engaged by potential buyers. The owners agreed to pay the agent a fee of €10 million upon sale. The agent, acting for the buyers, then negotiated the sale of the hotel for €211.5 million. The agent did not adequately disclose to the buyers the fee that would be received from the hotel owners.  The fee therefore amounted to a bribe in English law.

The issue was whether the buyers had a proprietary claim to the fee of €10 million that the agent had received from the owners. In light of the decision in Sinclair, the assumption might be that the answer would be a resounding “No”. That was indeed the outcome at first instance.  The Judge decided, applying Sinclair, that the claim was personal not proprietary. The only issue on appeal was whether this decision was correct. The Court of Appeal, unanimously, held that it was not and that the owners had a proprietary claim to the bribe.

In reaching its decision, the Court relied on the comments in Sinclair that a claimant can assert a proprietary interest where the asset has been acquired only by taking advantage of an opportunity or right which was properly that of the principal. The reasoning was as follows:

  • The Sellers were to be treated as having been prepared to sell the hotel for  €201.5 million, being the actual sale price of €211.5 million less the fee of €10 million paid to the agent; 
  • the Buyers therefore had the opportunity to acquire the hotel for €201.5 million;
  • the bribe of €10 million was a sum obtained by the agent by exploiting that opportunity;
  • this meant the bribe was held on trust for the Buyers, and the Buyers had a proprietary claim to it.

Concluding remarks

The outcome of these cases is that the law is uncertain and dependent on very fine factual decisions. This is the view of one of the appeal Judges in FHR European Ventures.

The position is that there was previously a long-standing conflict in English law as to whether there could be a proprietary interest in a bribe. The expectation was that ultimately it would be decided that a proprietary claim could exist, as was and still is the case in other common law countries.

Sinclair then appeared firmly to restate the principle that there could be no proprietary interest in a bribe (despite not being a case about bribes at all). That reasoning was then followed specifically in relation to a bribe in the Cadogan Petroleum case.

But FHR European Ventures has reopened the debate.  It seems a strained argument that a bribe is the diversion of an opportunity to acquire an asset at a lower price, thus giving rise to a proprietary claim. Indeed, the basis of the reasoning of the Court in FHR European Ventures is unclear. One Judge placed considerable weight on the fact that the Secret Commission Agreement was “part of the overall arrangement surrounding the purchase of the Hotel”. Another Judge relied on the fact that the bribe had been paid to the agent by the seller from the purchase monies paid by the buyer. This presumably means that, in the future, it may be argued that the absence of these factors would mean the absence of a proprietary claim.

In truth, the conflict is between a strict policy of ensuring that a bribe-taking official should be stripped of all the benefits that flow from the receipt of a bribe, and a strict but narrow application of the relevant conceptual principles. This issue needs to be authoritatively and clearly settled by the Supreme Court or by Parliament.