Can an agent keep a bribe or secret commission?

The Supreme Court has finally resolved the tricky question of who is the rightful owner of a bribe that has been paid to an agent – something that has been troubling courts and academics alike for the last 200 years. The debate has centred round whether a bribe or secret commission received by an agent is “held on trust” for his principal, which establishes a proprietary right, or whether the principal’s claim is a personal one for equitable compensation equal to the value of the bribe or commission.

Whilst this may seem esoteric, the answer to this question can be crucial in litigation against dishonest agents. If the bribe is held on trust, the principal can: seek injunctive relief; trace it into the hands of a third party; and/or recover it as trust property; and claim it as a secured debt in liquidation in preference over unsecured creditors. If the claim is merely for equitable compensation the best the principal can hope for is to claim against the agent personally and keep their fingers crossed that the agent still has the funds to pay upon judgment. If the agent has passed the funds to a third party the principal could not trace the funds. If the agent was bankrupt or in liquidation the principal would have no preference over other creditors and would therefore be unlikely to recover all or any of the bribe/secret commission. The Supreme Court recognised that this second approach defeats the purpose of the general rule that an agent shall not make a secret profit and if it does it shall account to its principal for that profit.

In FHR European Ventures LLP & Others v Cedar Capital Partners LLC [2014] UKSC 45, the Supreme Court in a unanimous decision led by Lord Neuberger held that bribes and secret commissions are held on trust by an agent for its principal. In doing so it overturned many well-known authorities (including Lister v Stubbs[i], Sinclair v Versailles[ii] Heiron[iii] and Tyrrell[iv]) and aligned English law with other commonwealth jurisdictions. A brave move considering that Lord Neuberger LJ (as was) delivered the leading judgment in Sinclair whilst in the Court of Appeal!

Background

FHR European Ventures LLP (“FHR”) & others purchased the share capital of the Monte Carlo Grand Hotel SAM, which owned a long leasehold interest in a hotel of the same name, from Monte Carlo Grand Hotel Ltd (“the Vendor”) for €211.5m. Unbeknownst to FHR, its agent, Cedar Capital Partners LLC (“Cedar”), who had negotiated the purchase and therefore owed fiduciary duties to FHR as its agent, had entered into a contract with the Vendor which provided a payment of a €10m fee upon a successful conclusion of the sale. The Vendor paid the €10m fee to Cedar just over two weeks after the sale. The question before the Court was who owned the €10m fee and on what basis?

First Instance

It was held at first instance that Cedar had not made proper disclosure to FHR about the fee. Simon, J concluded that he should (1) make a declaration of liability for breach of fiduciary duty of Cedar for failing to obtain FHR’s informed consent in respect of the €10m fee; (2) order Cedar to pay this sum to FHR; but (3) refuse to grant FHR a proprietary remedy in respect of this sum.

Court of Appeal

Upon FHR’s appeal of conclusion (3), the Court of Appeal held following a tricky analysis of Sinclair that Cedar received the €10m fee on constructive trust for FHR absolutely. Cedar appealed to the Supreme Court.

Supreme Court

The usual rule is that where an agent acquires a benefit which came to his notice as a result of his fiduciary position or thanks to an opportunity which resulted from his fiduciary position, equity holds that the agent is to be treated as having acquired the benefit on behalf of his principal and it is beneficially owned by the principal (the Rule).

Lord Neuberger rejected Cedar’s unattractive argument that bribes and secret commissions ought to be exempt from the Rule because the sum paid could not have been received by the principal. He concluded that it was simple economics, if a bribe or secret commission had been paid there is a strong possibility it has disadvantaged the principal. In this case, FHR may have acquired the hotel for €10m less if the payment to Cedar had not been made.

A quick canter through a wealth of 19^th Century case law and opinion and the Supreme Court concluded that a bribe or secret commission accepted by an agent is held on trust for his principal who is entitled to a proprietary interest in the benefit. In doing so, it overturned a number of cases that were decided inconsistently (Tyrrell) or those where the law took a wrong turn (Heiron, Lister and subsequent decisions in Powell & Thomas, Attorney-General’s Reference (No 1 of 1985) and Sinclair).

Consequences

The decision may well have significant implications. Some considerations may be:

1. The rule is not confined to traditional agent/principal relationships. It would include other types of fiduciary relationships: employer/employee (Lister v Stubbs); trustee/beneficiary (Keech v Sandford[v]); company director (Sinclair v Versailles); solicitor/client (Tyrrell) and public official (AG v Reid[vi]).
2. The principal may be able to obtain early stage freezing orders against the agent and in addition obtain proprietary injunctions to freeze bribes/commissions and their traceable proceeds. If the proceeds have been passed on to a third party, Chabra relief may be available against the third party.
3. Limitation may not start running (see section 21(1)(b) of the Limitation Act 1980) as the claim will be that the agent (trustee) holds the sums on trust for the principal (beneficiary) and so may fall under the definition of: “to recover from the trustee trust property or the proceeds of trust property in the possession of the trustee, or previously received by the trustee and converted to his use“.
4. Recovery against corrupt agents has just been made much easier. A principal now has the option to trace into the agent’s assets, which may be kept in a bank or potentially into the assets of third-party knowing recipients and claim any profits of the fraud – such as a return on any investments made with the bribe. If the agent’s investments failed, the principal can still rely on a personal claim against the agent equal to the amount of the original bribe or commission.
5. If the agent is in liquidation, the principal will rank as a secured creditor ahead of the unsecured creditors – something that had previously concerned the judiciary and indeed Lindley LJ in Stubbs v Lister had stated that the notion there was a trust “startle[d] him, not least because it would give the company the right to the money in the event of the agent’s bankruptcy.” The Supreme Court considered this concern was outweighed by the arguments in favour of granting enhanced relief to principals.

So a salutary lesson for any agent who is tempted to accept a bribe or secret commission. Not only are you obliged to abide by the Bribery Acts 2010 and 2012, you should also ensure that any conflict of interest or side deal which might compromise your loyalty to your principal is properly disclosed and approved in writing by your principal before you go ahead.

Bribes after all are generally frowned upon: “[b]ribery is an evil practice which threatens the foundations of any civil society” Lord Templeman (AG v Reid) and Lord Neuberger concluded that “Secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world.” Is it really any surprise that the Supreme Court has come to this conclusion?

[i] Lister v Stubbs (1890) LR 45 Ch D 1

[ii] Sinclair Investments Ltd v Versailles Trade Finance Ltd [2012] Ch 453

[iii] Metropolitan Bank v Heiron (1880) 5 Ex D 319

[iv] Tyrrell v Bank of London (1862) 10 HL Cas 26

[v] Keech v Sandford [1726] Sel Cas Ch 61

[vi] Attorney General v Reid [1994] 1 AC 324