The Supreme Court rights a "wrong turn"

FHR European Ventures LLP and others (Respondents) v Cedar Capital Partners LLC (Appellant)

The Supreme Court has ruled that a bribe or secret commission received by an agent is held by the agent on trust for his principal. This decision, in the Supreme Court’s own words, answers a “rather technical” question and ends a line of 200 years of inconsistent judicial decisions and academic controversy. In practical terms, it gives the principal a proprietary claim to the bribe or commission; the position was previously that the principal (arguably) had a claim merely for equitable compensation in a sum equal to the value of the bribe or commission.

The facts

The appellant acted as the respondents' agent in negotiating the purchase of a hotel. Accordingly the appellant owed fiduciary duties to the respondents. In breach of those duties, the appellant received a €10m fee from the vendor without making proper disclosure to the respondents or obtaining their informed consent. The issue for the Supreme Court was whether the appellant held the €10m on trust for the respondents, thus providing the respondents with a proprietary claim over the money, or whether the respondents had a claim merely to equitable compensation.

The general equitable rule

Where an agent acquires a benefit which has come to him as a result of his fiduciary position, or pursuant to an opportunity which results from his fiduciary position, the general equitable rule (the Rule) is that he is to be treated as having acquired the benefit on behalf of his principal; it follows that the principal is the beneficial owner of that benefit and has a proprietary right to it. Until the ruling in this case, the authorities had provided inconsistent answers to the question of whether the Rule applies where the benefit is a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal. The cases of Tyrrell v Bank of London (1862) 10 HL Cas 26, Metropolitan Bank v Heiron (1880) 5 Ex D 319 and Lister & Co v Stubbs (1890) 45 Ch D 1 all suggested that a principal does not have a proprietary interest in a secret commission or bribe. However, in a number of other 19th century cases and, importantly, the Privy Council case of Attorney General for Hong Kong v Reid [1993] UKPC 36, the opposite view was taken. More recently, in Sinclair Investments Ltd v Versailles Trade Finance Ltd [2012] CH 453, the Court of Appeal decided to follow Heiron and Lister (both because it was bound by them and because it took the view that they were right in principle).

The parties’ positions

The appellant argued that the Rule should not apply to a bribe or secret commission paid to an agent, because it is not a benefit which was derived from assets which are, or should be, the property of the principal. The respondents contended that the Rule did apply, because, in any case where an agent receives a benefit, which is, or results from, a breach of fiduciary duty, the agent holds the benefit on trust for the principal.

Judgment

The Supreme Court held that as a matter of legal authority there was no plainly right or plainly wrong answer and so looked to matters of principle and practicality. The Court dismissed the appeal and held, among other things, that:

• the respondents’ position was attractive on the basis that it offered certainty and that, where there is no plainly right answer or any other good reason, it was right for the Court to opt for a simple answer;
• in terms of elementary economics, it is possible that any bribe will have disadvantaged the principal (for example, in this case where the vendor of the hotel may have enhanced the purchase price on the basis that it was paying €10m away to the agent);
• bribes and secret commissions undermine trust in the commercial world;
• in the case of insolvency of the agent, the agent’s unsecured creditors will not be prejudiced by the principal’s proprietary claim because the bribe or secret commission consists of property which should not be in the agent’s estate at all; and
• a principal whose agent has obtained a bribe or secret commission should be able to trace the proceeds of the bribe or commission into other assets and to follow them into the hands of knowing recipients.

In finding for the respondents and clarifying the legal position, the Court disapproved of Tyrrell and overruled the decisions in Heiron and Lister saying that the law had taken a wrong turn.

Comment

Aside from the fact that the position at law has been clarified, the ruling is significant for two main reasons: firstly, in the event of the agent’s insolvency the principal has a proprietary claim which gives the principal effective priority over the agent’s unsecured creditors (whereas a right only to an equitable compensation claim would rank equally with other unsecured creditors); and secondly, a proprietary claim gives the principal the right to trace the bribe or commission and follow it in equity (whereas a right only to an equitable compensation claim would give the principal no such right to trace and follow).