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.

Case reference: FHR European Ventures LLP and Others (Respondents) v Cedar Capital Partners LLC (Appellant)[2014] UKSC 45 

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 favourable 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 arguments

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 favoured 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).

Comment

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”.