The Supreme Court's recent judgment in FHR European Ventures LLP and others v. Cedar Capital Partners LLC clarifies the treatment of bribes or secret commissions received by agents or those in fiduciary positions. The question before the Court was whether a bribe or secret commission received by an agent was held by that agent on constructive trust for his principal, or whether the principal's remedy lay in a claim for equitable compensation for the value of the bribe or commission. In circumstances where a bribe or commission is held on trust, the principal's claim is proprietary, whereas if the principal's claim is for equitable compensation, his claim is not proprietary but rather a personal claim against the agent or fiduciary.

In the judgment of the Court, delivered by Lord Neuberger, it was noted that the position was previously unclear, following over 200 years of inconsistent judicial decisions on the issue. However, his Lordship concluded that, taken as a whole, the authorities (along with "arguments based on principle and practicality") supported FHR's case that bribes or secret commissions paid to fiduciaries were held on trust for the benefit of the principal. Furthermore, his Lordship made it clear that previous authorities2often referred to in support of the contrary position (i.e. that bribes gave rise to a claim for equitable compensation only) should be treated as overruled. 

Background

In December 2004 the respondent, FHR, purchased the issued share capital of a Monte Carlo hotel company for €211.5 million. The appellant, Cedar, which provides consultancy services to the hotel industry acted as FHR's agent in negotiating the purchase, and thus owed fiduciary duties to FHR. Cedar had also entered into an exclusive brokerage agreement with the seller, pursuant to which the seller was to pay Cedar €10 million following the sale of the hotel company. The €10 million brokerage fee was paid to Cedar in January 2005.

Proceedings were brought in November 2009 against Cedar for recovery of the €10 million - the main issue at the trial being whether Cedar had properly disclosed the exclusive brokerage agreement to FHR. The judge at first instance concluded that Cedar did not give proper disclosure.3 In a further judgment,4 whilst the judge declared that Cedar's non-disclosure was a breach of its fiduciary duty, and that it should compensate the claimants by €10 million, he refused to grant the claimants a proprietary remedy in respect of that sum.

FHR successfully appealed to the Court of Appeal,5 which declared that Cedar had received the €10 million on constructive trust, which it held for FHR absolutely, and therefore FHR had a proprietary interest in the €10 million. On appeal by Cedar, the point at issue before the Supreme Court was whether FHR was entitled to a proprietary remedy in respect of the €10 million received by Cedar.

Principles from inconsistent authorities

The well-established equitable rule6 on which the appeal focuses is the rule that, where a fiduciary acquires a benefit or encounters an opportunity that came to his attention as a result of his fiduciary position, he is to be treated as having acquired that benefit on behalf of his principal. As such, the benefit is beneficially owned by the principal, who is entitled to a proprietary remedy against the fiduciary.

Cedar argued that the normal rule should not apply to a bribe or secret commission paid to an agent, on the basis that a bribe or secret commission is not a benefit which can be properly said to be the principal's property. FHR contended that, in any case, where an agent receives a benefit amounting to, or resulting from, a breach of fiduciary duty, the agent holds the benefit on trust for the principal.

Lord Neuberger acknowledged that there are two principled arguments, often found in inconsistent decided cases, that support the respective positions of the parties. On the one hand, in circumstances where a fiduciary has exploited a commercial opportunity for his own benefit, the question is simply whether the exploitation is sufficient to attract the application of the rule7. The rule applied where the exploitation by the agent was in breach of his fiduciary duty. This formulation of the rule, according to his Lordship, "has the merit of simplicity". The opposing view has its roots in the Tyrell decision of the House of Lords in 1862. Supporters of the view in Tyrell argue that no constructive trust could arise in circumstances where the fiduciary was acting outside of the limits of his agency. Lord Neuberger admits that the reasoning of the House in Tyrell "is not always entirely easy to follow".  However, it appears from subsequent cases8 that the principle on which this view rests is that the benefit received by the agent cannot be treated as belonging to the principal. Therefore, because the benefit never belonged to the principal, a constructive trust cannot be said to attach to it.

Commenting on the principle in support of FHR's case, Lord Neuberger pointed to the paradox that would arise if Cedar's position is accepted, namely that a principal has no proprietary right to his agent's bribe or secret commission. This could lead to a curious scenario in which a principal could be worse off than his agent who obtains a benefit under questionable circumstances.

The role that bribes and secret commissions have in undermining trust in the commercial world was also highlighted by Lord Neuberger. As such, the law would be expected "to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission". International conventions, along with domestic legislation such as the Bribery Acts of 2010 and 2012, were highlighted as examples of the great concerns and efforts to address bribery and corruption in recent times. It is in this wider policy context that his Lordship expressed the Court's view that the "the law took a wrong turn" in the cases which followed Tyrell, which should be treated as overruled.

Arguments based on practicality

In view of the above, Lord Neuberger said that the case put forward by Cedar, supported by the decision in Tyrell, gives rise to "artificiality and difficulties", "seems unattractive" and is "more likely to result in uncertainty". In contrast, the case put forward by FHR regarding the application of the equitable rule benefited from "clarity and simplicity [which] are highly desirable qualities in the law".

Conclusion

The Supreme Court's decision provides an affirmative answer to the question of whether a bribe or secret commission received by an agent is held on trust for his principal. The corollary of the decision of course is that a beneficiary is entitled to a proprietary remedy against the fiduciary.

Two practical consequences of the Court's decision are notable:

  • Because a principal is entitled to a proprietary claim in respect of the bribe or secret commission, he can trace or follow the proceeds of such benefits conferred on the agent. The ability to trace these proceeds means that a beneficiary will be able to assert rights over other assets owned by the agent, and, in certain circumstances, can follow the proceeds into the hands of third party knowing recipients.
  • The application of the rule in all circumstances means that the proprietary claim against the agent gives the principal priority over unsecured creditors in the event of the agent's insolvency. The Court noted the argument that this would prejudice the agent's unsecured creditors but dismissed it in the context of bribes or secret commissions.  This was on the basis that (i) such proceeds should not have been in the agent's estate at all and (ii) such proceeds often reduced the benefit from the underlying transaction which the principal will have obtained, therefore the proceeds can be fairly said to be his property.

This judgment makes it easier for claimants to trace money to third parties such as banks, that may hold an agent's assets, in breach of fiduciary duty. In these circumstances, a constructive trust arises and the proceeds can be traced and an order obtained for their return.