Three recent cases in the UK courts have clarified some important issues relating to corruption and bribery. Two cases are important from a civil liability point of view, widening the scope for claimants to recover damages from a wrongdoer, while the third clarifies the position under the criminal law regarding corrupt payments to public officials.
The criminal case of R v J clarifies that consent of the principal/employer is not relevant to a charge of making corrupt payments to public officials for the purposes of the pre-Bribery Act 2010 position. There are a number of proceedings currently before the courts – and undoubtedly some still under investigation – to which the Prevention of Corruption Act 1906 (the “PCA 1906”) applies. It remains to be seen whether the case has wider ramifications for the new regime.
In relation to the civil cases, the takeaway message for organisations is abundantly clear: where there has been bribery or corruption, the English courts will not hesitate to give weight to public policy arguments in extending the reach of traditional measures to right the wrong and compensate any victims. For businesses damaged by the effects of bribery and corruption, the cases open up further avenues to seek compensation and ensure that a claimant is not unjustly harmed by the insolvency of a wrongdoer.
In Novoship v Nikitin, a classic case of fraud by an agent who is responsible for negotiating contracts for the benefit of his principal, the court considered the extent of liability of a “dishonest assister” (one who assists a person who pays a bribe). It was determined that a dishonest assister may be liable to account for profits to the injured beneficiary as if it were a trustee.
The UK Supreme Court in FHR European Ventures v Cedar Capital Partners relied significantly on policy arguments in highlighting the courts’ intent to compensate those harmed by bribery and corruption and punish wrongdoers. It overturned previous authority in holding that a principal may elect between a personal and a proprietary claim in respect of an agent who has made a secret commission. This opens up further options for a principal who may be faced with an insolvent agent. The principal will have priority over unsecured creditors and may be able to follow and trace the unauthorised proceeds.
R v J (5 December 2013, Court of Appeal)1
R v J confirms that for charges of bribery of public officials under the PCA 1906, consent of the principal is not relevant. However, consent may be relevant in the case of bribery involving commercial parties. This is really an evidential point but a crucial distinction that is now settled. The wider implications remain to be seen.
The defendants were charged with conspiracy to corruptly give agents of the tax authorities of a Commonwealth country a sum of money with a view to inducing them to give a company favourable tax treatment. As the alleged bribes occurred between 1998 and 2006, the defendants were charged under section 1 of the PCA 1906.2
Section 1 of the PCA 1906 provides that an agent who corruptly obtains or agrees to obtain or accept from any person, for himself, or for a third party, any gift or consideration as an inducement or reward for doing or having done any act in relation to his principal’s affairs or business, shall be guilty of a crime, as will anyone who agrees to give any gifts or consideration to an agent for procuring such an act.
The Court of Appeal considered whether consent of the principal to the agent’s receipt of funds was relevant. The defence argued that only a secret payment constitutes a bribe and that therefore the prosecution must show an absence of consent on the part of the principal. The Court of Appeal disagreed and held that there was no such requirement in the case of a public official as the state could not give such consent. Any payment received by an agent of the state would equate to a bribe. In the case of the agent to a commercial principal, however, the court considered that the informed consent of the principal would usually mean that the payment was not made corruptly. This does not mean that lack of consent needs to be proved in those cases, only that consent of the employer may be a factor taken into account in determining whether or not the payment was made or received corruptly.
The question arises as to the implications of this case for prosecutions brought under the Bribery Act, which did away with the principal/agent concept inherent to the PCA 1906. It is possible that consent could be relevant to an offence under section 4 of the Bribery Act, which states that a “relevant function or activity” is performed “improperly” if it is in breach of a “relevant expectation” (breach of good faith, impartiality or because the person in a position of trust failed to act in the manner expected). The question is whether it is “improper” so as to attract criminal liability where an agent makes a payment to a customer with the full knowledge and consent of the principal.
Novoship (UK) Ltd v Yuri Nikitin (4 July 2014, Court of Appeal)3
“Knowing receipt” and “dishonest assistance” are two common claims in fraud and corruption cases. These claims are generally focused on third parties and could include companies or trusts involved in the wrongdoing. The Court of Appeal in Novoship was careful to restrict such claims to those where it can be shown that the dishonest assistance caused the profit.
In Novoship, an agent who breached his fiduciary duties by taking bribes was assisted by a third party. The question for the court was whether an account of profits could be ordered against this third party (or “dishonest assister”). It determined that it could, though the claimant must establish causation, remoteness and damage.
Mr. Mikhaylyuk, an employee of Novoship, had responsibility for negotiating the charter of vessels in the company group. In breach of his fiduciary duties, Mikhaylyuk set up a series of schemes by which he received bribes in exchange for favours in relation to the chartering of vessels. In one such scheme, he directed a secret commission to be paid by the charterer to both himself and a company owned by Mr. Nikitin, a Russian businessman. At trial, Mr. Justice Christopher Clarke held that Nikitin was aware of the commissions being paid to the company at Mikhaylyuk’s request, and that the payments were most likely made for a corrupt purpose (i.e. the likely reason for the payments to Nikitin’s company was that he (Nikitin) had provided, or would provide, some benefit or advantage to Mikhaylyuk).
Mikhaylyuk and Nikitin also negotiated other charters within normal market conditions and at reasonable rates (the “Henriot Charters”). Nevertheless, considering their other dealings, the judge found that there was a strong possibility that a conflict of interest arose: Mikhaylyuk owed a duty of loyalty to Novoship that conflicted with his personal desire to favour Nikitin. The court held that Nikitin was liable for dishonestly assisting Mikhaylyuk in breaching his fiduciary duty since, given his position, he must have known of Mikhaylyuk’s conflict of interest. Nikitin, in assisting to arrange the Henriot Charters, was found to be a dishonest assister to Mikhaylyuk, the agent receiving the bribe. The judge described the relationship as one which “was corrupt at inception and had not been cleansed.”
Clarke J held Nikitin liable to account to Novoship for the profits that he and Henriot had made from the Henriot Charters. This ruling was appealed to the Court of Appeal.
The Court of Appeal agreed that an account of profits was available as a remedy against a dishonest assister due to the assister being accountable in equity and liable to account as a constructive trustee. The conclusion was justified on public policy grounds: to deter dishonest third parties from compromising the high standards of conduct expected of fiduciaries and as a matter of equity. As the Court of Appeal said:
Where, as here, the equitable wrong is itself linked with a breach of fiduciary duty we see no reason why a court of equity should not be able to order the wrongdoer to disgorge his profits in so far as they are derived from the wrongdoing … it would be … inappropriate to differentiate between the availability in principle of remedies relating to profits made by a knowing recipient on the one hand and profits made by a dishonest assister on the other.
However, liability attaching to a dishonest assister (e.g., an account of profits) is still subject to common law rules of causation, remoteness and measure of damages. In this case, the profit Nikitin made was not due to his dishonest assistance, but rather an unexpected change in market conditions which worked in his favour. Therefore, there was an insufficient direct causal connection between entry into the charters and the resulting profits. The appeal succeeded.
The decision is an unambiguous reminder that dishonest assisters face very serious consequences if their actions can be said to have caused any improper profit. A dishonest assister could be a professional who has helped to create a network of entities for use in a corrupt scheme, or a related company or other entity.
Thus, seeking an account of profits from such a third party is another potential claim available to a claimant on the unfortunate end of a corrupt transaction.
FHR European Ventures v Cedar Capital Partners (16 July 2014, UK Supreme Court)4
The Supreme Court in FHR has settled the question of whether a principal is entitled to a proprietary remedy (i.e. a remedy in respect of a defendant’s assets allowing the claimant to priority over the defendant’s unsecured creditors) against an agent who has breached his duties by accepting a bribe. It has held that such a remedy is available.
FHR purchased the issued share capital of a company owning the leasehold on the Monte Carlo Grand hotel for €211.5 million. Cedar acted as FHR’s advisors on the purchase. Unbeknownst to FHR, however, Cedar also entered into an arrangement with the sellers under which it would receive a €10 million commission from the sellers for securing a purchaser. FHR sought recovery of this secret commission.
The trial judge concluded that Cedar, having failed to obtain FHR’s, that, is, the principal’s, fully informed consent, had breached its fiduciary duty and should be ordered to repay the sum to FHR. However, the judge refused to grant a proprietary remedy: the remedy was equitable in nature and thus compensation only was available.5 Prior decisions of the English courts were not clear as to whether a principal has a proprietary claim where an agent breached his duties by receiving a bribe or secret commission (e.g., some authorities suggested that a proprietary claim could only arise in situations in which an agent had derived a benefit from an activity undertaken on behalf of the principal). It was this point that was the subject of the appeal.
Lord Neuberger, delivering the judgment of the UK Supreme Court, overturned the previous Court of Appeal authority, Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd  EWCA Civ 347 (and other prior decisions), which held there could be no proprietary interest in the proceeds of a fraudulent sale of shares as the proceeds were not beneficially owned by the claimant. In other words, it was not necessary for the agent to have derived the relevant benefit from assets which were, or should be, the property of the principal.
Lord Neuberger appears to base the decision primarily on principles of agency law and the weight of policy arguments: the availability of a proprietary claim applies to all unauthorised benefits that an agent receives, consistent with the fundamental principles of the law of agency, and thus the principal is entitled to the entire benefit of the agent’s acts in the course of his agency. His Lordship concluded at :
Wider policy considerations also support the respondents’ case that bribes and secret commissions received by an agent should be treated as the property of his principal rather than merely giving rise to a claim for equitable compensation… Secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world. That has always been true, but concern about bribery and corruption generally has never been greater than it is now… Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.
It will not come as a surprise to commercial entities that the mirror image to the increased opportunities to recoup losses as a result of bribery of corruption is the greater risk that non-compliant entities may be forced to pay compensation in wider circumstances. These recent developments are a reminder of the English courts’ proactive stance in dealing with corruption and bribery.
The decisions, FHR and Novoship in particular, provide a timely insight into the policy considerations applied by the English courts in relation to bribery and corruption. Lord Justice Longmore in Novoship commented, following reference to an example of bribery from Greek mythology, that “centuries later, bribery is still prevalent and pervasive however much legislators and judges try to stamp it out.”6 Lord Neuberger in FHR stated that “one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.”7
The conclusion that a remedy of account of profits is available against one who dishonestly assists a fiduciary to breach his fiduciary obligations, even if that breach does not involve a misapplication of trust property (Novoship) gives beneficiaries a greater opportunity to recover their entire loss; but it recognises that a real causal connection is necessary. Meanwhile, in FHR the Supreme Court has confirmed that the principal will enjoy priority over other creditors in situations in which an agent has made a secret commission or taken a bribe. The decisions in FHR and Novoship demonstrate that the Court of Appeal and Supreme Court recognise the important policy in deterring bribery and corruption, and the law continues to afford beneficiaries powerful means of recouping losses.