On 31 March 2021, the Court of Appeal[1] decided that a “fiduciary relationship” between broker and borrower is not a necessary pre-condition for the grant of relief (including rescission) against a lender who has not disclosed commission payments to a broker. This judgment has lowered the bar for borrowers seeking rescission of loan agreements in these circumstances.
The appeal arose out of 2 separate cases involving the same lender and broker. Rescission was granted in both cases by the High Court, with conflicting views expressed as to the need for a fiduciary relationship between broker and borrower. In the Wood case, the Judge held that it was not necessary for a fiduciary relationship to exist between client and broker for relief to be granted;[2] the existence of fiduciary duty provided an alternate route of relief.[3] In the Pengelly case, a different Judge held that a fiduciary relationship was a necessary pre-condition for the grant of relief (including rescission) against the party who paid the commission.
“…the meaning of bribe, for the purpose of civil remedies, extends well beyond its popular connotation of a corrupt payment, to include any payment or gift made as an inducement to an “agent” and not disclosed to the principal”.[4]
The appeal raised 3 issues:[5] (i) Is a fiduciary relationship between the client and the broker a necessary pre-condition to the grant of relief against the payer of the undisclosed commission? (ii) Did a fiduciary relationship exist between the client and the broker in these cases? (iii) Are the commissions that were paid properly categorised as half-secret commissions?
Fiduciary relationship?
“The risk inherent in requiring “a fiduciary relationship” as a pre-condition for remedies in respect of bribes or secret commissions is either that civil remedies which should be available will be denied because there is not a fiduciary relationship or that the term “fiduciary relationship” will be applied so widely as virtually to deprive it of content beyond the simple proposition that a person under a duty to another must not accept or be offered an inducement to influence them in the performance of that duty.”[6]
“The question…is whether the payee was under a duty to provide information, advice or recommendation on an impartial or disinterested basis. If the payee was under such a duty, the payment of bribes or secret commissions exposes the payer and the payee to the applicable civil remedies. No further enquiry as to the legal nature of their relationship is required.”[7]
“It is the content of the duty, not the label attached to it, that matters.”[8]
Broker’s Duty?
On the broker’s terms and conditions and the findings of fact, the broker “…was under a duty to make a disinterested selection of mortgage product to put to its clients in each case”.[9]
Secret commission?
It was contended that the borrowers in each case knew, or would have done if they had read the terms of business, that the broker might be paid fees by the lender; it was accepted that the borrowers were not told the amounts of those fees or commissions.[10] It was argued that, in Wood and Pengelly, the commissions were half-secret and the court therefore had a wide discretion as to remedy, which should not extend to rescission.
Where the commission is half-secret, the resulting contract is not voidable at the election of the borrowers. However, if there is a breach of the broker’s duty, the court then has a discretion to award the most appropriate remedy, which could (but would not necessarily include) rescission.[11]
The broker’s terms and conditions stated that the broker “may” receive fees from lenders with whom it placed mortgages and the broker “will” tell the borrower of the fee amount. Neither borrower was informed that the lender was paying commission to the broker, or the amount. The Court of Appeal concluded that these terms “…imposed an unqualified obligation on the broker to inform the borrower, before a mortgage was taken out, of the amount of the fee”.[12]
The court held that, absent the required notification, the borrowers were not on notice that any commission might be paid and the only conclusion was that no commission was to be paid[13]. The undisclosed commissions were therefore secret (not half-secret).
Remedy
“…the common law remedies of money had and received and damages are available against the third party payer of a bribe or secret commission, and that rescission of a transaction with the third party is available as of right, subject to making counter-restitution.”[14]
Summary
This decision is a reminder to lenders of the need to ensure that broker commission payments are adequately disclosed.
If a broker is under a duty to provide information, advice or recommendations on an impartial or disinterested basis (fact sensitive) and fails to adequately disclose the commission it is to be paid, the law on secret commission payments will apply.
If rescission is granted by the court, the loan agreement and any security provided will be unwound, which will mean that: (i) the borrower will have to repay the original loan to the lender; (ii) the lender will have to repay any payments made by the borrower together with the commission paid by the lender to the broker; in Wood, the commission payments totaled £92,927.[15]
Lenders should: (i) review the adequacy of their existing commission disclosure processes; and (ii) consider whether their trading agreements with brokers afford adequate protection (e.g. by way of an indemnity) if a borrower claims rescission following a broker’s failure to disclose commission payments.
