A recent UK Supreme Court judgment underscores the rising judicial intolerance among Western jurisdictions of bribery and corruption.
The decision resolves a question which has been long-unsettled in UK law and brings the UK into line with New Zealand.
In FHR European Ventures v Cedar Capital Partners1, FHR had bought shares in a Monte Carlo hotel company for €221.5m. Cedar, FHR’s consultant and agent negotiated the purchase. Cedar also had a secret exclusive brokerage agreement with the vendor, which earned Cedar a €10m fee.
The UK Supreme Court held unanimously that Cedar had breached its fiduciary duty and the €10m was therefore held on trust for FHR. For reasons of “practicality, policy and principle” the Court decided that in the absence of an obvious “right” answer from the centuries of case law, the simplest and clearest approach was the best – the bribe and any proceeds will be treated as the property of the principal.
A principal now has the right to point to the bribe or secret commission received by an errant agent and say 'that is mine, give it back’.
UK now in line with New Zealand position
The question has been settled in New Zealand since 19932, when a former New Zealand national and Hong Kong official invested the proceeds of bribes in Tauranga real estate. In this country, a bribe or secret commission received by an agent is deemed held on trust for his or her principal.
But the position in the UK since 1862 has been that the principal merely has a claim for compensation equal to the value of the bribe or commission.
The key point is that, for an organisation, the legacy of a bribery event can linger for a long time. Cedar, like Reid before it, confirms that any bribe or secret commission received by an organisation acting in a fiduciary capacity will legally be the property of its principal and can be traced by the principal into the organisation’s assets. There is also a cautionary tale here for unsecured creditors, who might suddenly find their interests subordinated by a wronged principal. It may also be possible to trace the bribe or secret commission into the hands of third parties.
This will be so even in situations which might at first blush seem more like sharp commerce than cloak-and-daggers bribery, as with the exclusive brokerage agreement in the Cedar case.
The take-home message
In Cedar, Lord Neuberger commented that:3
Concern for bribery and corruption has never been greater than it is now... Accordingly, one would expect the law to be particularly stringent.
This judicial attitude, found also in Reid, underscores the strong international consensus against bribery and corruption.
Last year, the OECD recommended that New Zealand significantly increase its efforts to investigate and prosecute foreign bribery4. New Zealand responded by introducing the Organised Crime and Anti-Corruption Bill into Parliament in June 2014. New changes soon to be part of New Zealand law will expressly confirm that a corporation can commit a foreign bribery offence.5
Cedar is further evidence that domestic legal systems are evolving strongly to condemn bribery and corruption. Even a lengthy history of contrary caselaw and divided academic opinion is not a decisive impediment. New Zealand businesses, especially those operating in foreign markets, should be aware of the risks of being associated with bribery and corruption, and how they are best addressed.