The principal of the person who received it, according to a recent decision of the UK Supreme Court.

FHR v Cedar1

In 2004, FHR purchased the shares of a corporation which held a leasehold interest in the Monte Carlo Grand Hotel. FHR paid the vendor €211.5 million for the shares.

Cedar had acted as FHR’s agent in negotiating the purchase, but had also entered into an agreement with the vendor. Following completion of the sale, the vendor paid a €10 million fee to Cedar. The fee was not disclosed to FHR.

FHR sought to recover the fee from Cedar. By the time the case reached the Supreme Court, the sole issue was whether FHR’s claim against Cedar was personal (leading only to an award of equitable compensation) or proprietary (leading to a constructive trust – a far more advantageous remedy).

In a single judgment, the seven judges of the Supreme Court ruled in favour of FHR. Cedar had received the fee from the vendor on constructive trust for FHR, and was obliged to pay it to FHR.

Implications for New Zealand businesses

The decision may not surprise New Zealand lawyers. A similar question was answered more than 20 years ago in Attorney-General for Hong Kong v Reid.2 There, a corrupt prosecutor had received bribes in Hong Kong and invested them in real properties in New Zealand. The Privy Council ruled that the properties were held on constructive trust for the recipient’s employer.

However, it is worth noting that FHR v Cedar arose in a commercial context (rather than the shady criminal underworld). It contemplated the award of far-reaching proprietary remedies in a range of situations involving secret commissions or bribes, including:

  • the payment of a ‘brokerage fee’ by a vendor to an agent;

  • the grant of a ‘loan’ by a landlord to a lessee’s agent;

  • the transfer of shares by a vendor of land to individuals, to induce them to become directors of a company and agree to the sale;

  • the transfer of shares by a vendor of a mine to the secretary of the purchaser company;

  • the payment of a sum to a trustee, to induce him to retire in favour of the payer; and

  • the payment of a commission by a stock-broker to a trustee, to induce him to encourage his fellow trustees to use the stock-broker.

Whether the payment of a commission presents issues of this nature or, even more problematically, the prospect of criminal liability for the parties involved, depends on the particular circumstances. Even where payments are not inherently unlawful, non-disclosure can create issues.