Supreme Court delivers much-awaited judgment in FHR European Ventures LLP and Ors v. Cedar Capital Partners LLP[1]

What is the nature of the remedy available to a principal whose agent receives a bribe or secret commission? The answer to this basic question of restitutionary law has proved surprisingly elusive in England & Wales, but a 7-strong panel of the Supreme Court has now tackled two centuries of inconsistent case law and, in a single judgment, concluded definitively that the principal does have a proprietary remedy in such a case. The case overrules the contrary decision of the Court of Appeal in Sinclair Investments (UK) Ltd v. Versailles Trade Finance Ltd (in administration),[2]handed down in March 2011.

The Supreme Court's ruling addresses the scope of the general equitable principle that, when an agent acquires a benefit that came to his notice as a result of his fiduciary position or pursuant to an opportunity arising from his fiduciary position, he should be treated as having acquired the benefit on behalf of his principal, such that the principal is entitled not only to a sum equal to the benefit by way of equitable compensation (i.e., a personal remedy) but also a proprietary remedy to recover the benefit itself (this principle is referred to in the judgment as the "Rule"). The sole question before the Court was whether the Rule applies where the benefit obtained by the agent is a bribe or secret commission.

Whether the applicable remedy is personal or proprietary can matter immensely to a principal, because only in the latter case might he be able to (i) trace the benefit into the hands of a third party who has knowingly received the property from the agent; and/or (ii) benefit from any increase in the value of the benefit, for example if the agent has invested it wisely in shares or land.  


Cedar Capital Partners LLP ("CCP") entered into an agreement with the owners of the Monte Carlo Grand Hotel (the "Hotel") to arrange the sale of the Hotel for a fee of €10m (the "Brokerage Fee"). CCP also acted as agent for a consortium of investors (the "Consortium") regarding the purchase of the Hotel for €211.5m. Upon discovering that the Brokerage Fee had been paid to CCP, the Consortium sought disgorgement of the Brokerage Fee from CCP.

In the High Court, Simon J. found that CCP were liable to account for the Brokerage Fee, because it had not been sufficiently disclosed to the Consortium. However, he decided that there was no constructive trust giving rise to a proprietary right and that the Consortium had a personal claim only.

The Court of Appeal overruled the trial judge on the nature of the remedy and found that, in receiving the secret commission, CCP had exploited an opportunity properly belonging to the Consortium and the Brokerage Fee was thus held by CCP on constructive trust for the Consortium. CCP appealed against this decision.

Judgment of the Supreme Court

The Supreme Court unanimously dismissed CCP's appeal. Lord Neuberger, President, delivered the judgment of the Court. The Court ruled that, on balancing the conflicting authorities and the competing public policy considerations, it was just and fair that the Rule be applied in a case where the agent receives a bribe or secret commission in breach of his fiduciary duty to his principal.

The Court acknowledged that the law in this area had become "close to incoherent". It found authority dating back to 1829 that suggested that bribes received by an agent should be held on trust for the principal,[3] but observed also that the Court of Appeal had concluded, more than half a century later, that only a personal remedy exists in these circumstances: see Metropolitan Bank v. Heiron[4] and Lister & Co. v. Stubbs.[5] 

More recently, noted the Court, the contrary stance has been taken by the Privy Council in Attorney-General for Hong Kong v. Reid,[6] as well as in jurisdictions such as Australia[7] and, more recently still, Jersey.[8]

The Court therefore found that, in the final analysis, "it is not possible to identify any plainly right or plainly wrong answer to the issue of the extent of the Rule, as a matter of purely legal authority". Lord Neuberger thus proceeded to examine the policy considerations for and against applying the Rule to the facts of the case.

In favour of CCP's view that no proprietary remedy lies, the Court noted but dismissed the well-vented argument that there can be no property in a bribe or commission paid to the agent by a third party because it cannot properly be said to constitute assets belonging to the principal.

The Court was equally unsympathetic with CCP's reasoning that imposing a constructive trust in all cases would unfairly prejudice an insolvent agent's creditors by giving automatic priority to the principal over any bribes or commissions received. Such property, the Court countered, should never have been part of the agent's assets in the first place.

The Court thus reasoned that it is just for an agent to be required to disgorge any benefit arising from his breach of fiduciary duty: an agent owes a duty of undivided loyalty to his principal and must deliver up any benefit he obtains from breaching this duty. The law must assume that an agent acts in accordance with his duty, and the Court agreed that it would be a "curious" outcome if an agent could plead the fact of a bribe or commission in order to keep the benefit of his breach of duty yet be required to hand it over in the case of a less opprobrious breach.

Accordingly, the Court held that Heiron and Lister and the cases that have applied them—including Sinclair v. Versailles---should be treated as overruled.

In terms of the instant appeal, the Court concluded summarily that the Court of Appeal below had "rightly" regarded itself as bound bySinclair yet had "managed to distinguish it". Accordingly, the Court dismissed CCP's appeal.

What does this mean for you? 

The judgment of the Supreme Court in FHR is a welcome and long-overdue elucidation of the remedy of constructive trust in cases where an agent exploits his fiduciary position for his own benefit. 

In light of the judgment, those institutions and individuals who act as trustees, bankers, custodians and investment managers must consider their position extremely carefully if they are put on notice that the assets with which they are dealing may derive from a bribe or secret commission. Such parties face potential personal claims for dishonest assistance and knowing receipt if they continue to deal with the assets. A trustee in such a scenario should carefully consider whether to apply to court for directions.

The case is also a significant victory for the victims of bribes and other forms of corruption. Echoing Lord Templeman's declaration inReid that "[b]ribery is an evil practice which threatens the foundations of any civilised society", the judgment demonstrates that the law will not assist fraudsters and those who exploit relationships of trust and confidence, which must be treated as inimical to commercial interests. To this end, the judgment is in tune with the increasing condemnation of bribery and corruption in modern society, reflected most recently in the UK in the Bribery Act 2010. A principal who suspects that his agent has received a bribe or unauthorised commission is advised to assert his proprietary right over such benefits as soon as possible, before they fall into the hands of a bona fide purchaser for value without notice, who would have a defence to any tracing claim.

On the other side of the fence, this decision will focus the mind of and should deter an agent who is tempted to put himself in a position of conflict, even if the agent considers that the principal would not take up the benefit.

In summary, commercial parties dealing with agency relationships can now draw comfort from a bright-line rule: any secret profit or bribe acquired by the agent as a result of his agency and in breach of his fiduciary duty is held on constructive trust for the principal, such that the principal can trace the benefit into the hands of third parties, benefit from any uplifts in value and enjoy priority against unsecured creditors on the agent's insolvency.