FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45

The UK Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC considered whether a bribe or secret commission received by an agent in breach of his fiduciary duty to his principal was held on trust as a proprietary interest for the principal, or whether this merely gave the principal a claim for equitable compensation in the value of the bribe or commission. The court considered the established principles and held that the monies so received were held on trust by the agent for the principal.

Background

In December 2004, FHR European Ventures LLP (“FHR”) purchased the issued share capital of Monte Carlo Grand Hotel SAM (which owned a long leasehold interest in the Monte Carlo Grand Hotel) from Monte Carlo Grand Hotel Ltd (the “Vendor”) for €211.5 million. The purchase was a joint venture between the claimants in these proceedings, for whom FHR was the vehicle. Cedar Capital Partners LLC (“Cedar”) acted as the claimants’ agent in negotiating the purchase. It was common ground that Cedar accordingly owed fiduciary duties to the claimants in that connection. Cedar had also entered into an agreement with the Vendor, which provided for the payment to Cedar of a €10 million fee following a successful conclusion of the sale and purchase of the issued share capital of Monte Carlo Grand Hotel SAM. The Vendor paid Cedar €10 million around 7 January 2005. This was the bribe or secret commission at issue.

In November 2009, the claimants began these proceedings for recovery of the sum of €10 million from Cedar. The High Court made a declaration of liability for breach of fiduciary duty on the part of Cedar for having failed to obtain the claimants’ fully informed consent in respect of the €10 million and ordered Cedar to pay such sum to the claimants. The court, however, refused to grant the claimants a proprietary remedy in respect of the monies.

The claimants appealed to the Court of Appeal against the latter determination and was successful. The Court of Appeal made an order which included a declaration that Cedar received the €10 million fee on constructive trust for the claimants absolutely. Cedar appealed to the Supreme Court on this issue.

Applicable law

This appeal concerned the issue of whether a bribe or secret commission received by an agent is held by that agent on trust for his principal, or whether the principal merely has a claim for equitable compensation in a sum equal to the value of the bribe or commission. If the bribe or commission is held on trust, the principal has a proprietary claim to it, whereas if the principal merely has a claim for equitable compensation, the claim is not proprietary. This distinction is important as first, if the agent becomes insolvent, a proprietary claim would give the principal priority over the agent’s unsecured creditors. Second, if the principal has a proprietary claim to a bribe or commission, he can trace and follow it in equity.

At the outset, the Supreme Court set out the established principles which were relevant to the present proceedings but not in issue. These were, as follows:

  1. An agent owes a fiduciary duty to his principal because he is someone who has undertaken to act for or on behalf of his principal in a particular matter in circumstances which give rise to a relationship of trust and confidence;
  2. As a result, an agent must not make a profit out of his trust, and must not place himself in a position in which his duty and his interest may conflict; and
  3. A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty, by putting himself in a position where his duty to one principal may conflict with his duty to the other.

The court also noted the relevance of another well-established principle which applies where an agent receives a benefit in breach of his fiduciary duty. The agent is obliged to account to the principal for such a benefit, and to pay, in effect, a sum equal to the profit by way of equitable compensation.

Where an agent acquires a benefit which came to his notice as a result of his fiduciary position, or pursuant to an opportunity which results from his fiduciary position, the equitable rule (the “Rule”) is that he is to be treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal. Where the Rule applies, the principal has a proprietary remedy against the agent in addition to a personal one. The present proceedings concerned the limits or boundaries of the Rule - specifically, what is in dispute is the extent to which the Rule applies where the benefit is a bribe or a secret commission obtained by an agent in breach of his fiduciary duty to his principal.

What was in dispute in this matter was the extent to which the Rule applied where the benefit was a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal. Cedar contended that the Rule should not apply to a bribe or secret commission paid to an agent as it was not a benefit which could properly be said to be the property of the principal. The claimants argued that the Rule applied to bribes or secret commissions received by an agent because, in any case where an agent received a benefit, which was or resulted from a breach of the fiduciary duty owed to his principal, the agent held the benefit on trust for the principal.

Judgment

The court noted that while it is not possible, as a matter of legal authority, to identify any plainly right or wrong answer to the issue of the extent of the Rule, considerations of practicality and principle support the case that a bribe or secret commission accepted by an agent is held on trust for his principal. The court found that, taken as a whole, the authorities on this issue supported the claimants’ case.

The respondents’ formulation of the Rule had the merit of simplicity - any benefit acquired by an agent as a result of his agency in breach of his fiduciary duty is held on trust for the principal. The appellant’s formulation would be more likely to result in uncertainty. The court also noted that the 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 just giving rise to a claim for equitable compensation. Bribes and secret commissions undermine trust in the commercial world, and it is reasonable to expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.

For the reasons given above, the Supreme Court unanimously dismissed the appeal.

Practical considerations

This case underscores the need for persons in fiduciary positions, such as directors of companies and agents, to be very careful in their dealings, as any commissions or benefits obtained as a result of their fiduciary position may have to be disgorged and traced as if they were held on trust for the persons to whom the fiduciary duties were owed.