The common law on secret commission claims has become more settled in the recent years but not all claimants are adapting to recent cases. Since the appeal of Wood, claimants’ have a lower burden to discharge to succeed in their claims, but each case turns on its facts and that fact-specific analysis is often lacking. Moreover, it remains the case that for half-secret commissions the test is more rigorous and particularly business claimants may struggle to show that they did not know that an intermediary would be paid a commission.
Where a party engages a professional for their services without being told about, or agreeing to a price, there is an implied term that they will pay a “reasonable charge”.1 Where that same customer engages a professional who receives payment from a third party – a commission – for arranging a contract between that third party and their customer, the professional risks exposing themselves to a claim from that customer for taking a bribe. This different treatment arises out of the common law of agency and the concept that a principal is entitled to impartial advice from their agent, which the payment from a third party is deemed to undermine.
We are now seeing claimants across all commercial sectors advance claims, that the professional intermediary is their agent and must pay the commission received to the claimant. The intermediary may then be left without payment for their services. However, such claims are not without risk, as they are highly fact-dependent and the law firms advancing these claims are doing so on a volume basis and the claimants frequently do not engage with the difficulties their individual claims pose.
These claims are also being advanced to a certain extent against the third party, but in so far as that claim is dependent on the relationship with the intermediary, this article will focus on the claim against the intermediary. This is also much more varied and detailed in regulated sectors such as solicitors and in the financial sector,2 but here again, this article will focus on the practical implications at common law.
Basis
In order to establish a claim, the customer must show, in general terms, that the intermediary:
- Acted as their agent
- Received a payment from the third party with whom the customer contracted
- Did not disclose and obtain consent from the customer for the receipt of this commission
Traditionally and in its narrowest sense, an agent is someone who has the power to affect the legal relations of their principal with third parties. This requires neither contract nor remuneration.3 However, this has developed so that the law recognises limited agents, whose role might simply be the provision of information, and pure intermediaries (who are not agents).
The determination is also different for cases where the principal is told by their agent that the agent will receive a commission, but not how much (termed half-secret commissions), and where the principal is not told at all that the agent will receive a commission (fully secret commission). While arising out of a claim in the regulated sector and payment protection insurance, the case of Wood 4 held that in the case of a fully secret commission, all that the claimant needed to show was that the intermediary had a “duty to provide information, advice or recommendation on an impartial or disinterested basis”. This created a much lower standard than that usually arising in agency relationships, where traditionally a fiduciary relationship is required such that the agent owes the principal a duty of “single-minded loyalty”.5
Nonetheless, these claims are not automatically successful. As Wood recognised, these cases are fact-specific and even the remedies are not all available as of right.
Remedies
In general terms, claimants who can show that an intermediary was their agent are entitled to remedies ranging from recovery of the commission paid to the agent, damages arising out of the agent’s breach of duty in receiving a commission, and rescission of the contract entered into between the claimant and the third party. The agent obviously cannot give rescission of the third party contract, but somewhat curiously the claim for commission is also available against the third party, despite the fact that it will already have paid the commission once to the agent.
However, unlike some of the claims we have seen, the claimant must choose between claiming the commission that the intermediary earned and damages for the harm that the claimant has suffered.6 In all but exceptional cases, the commission is likely to be higher than the damages, particularly as the claimant and/or intermediary will likely have selected the cheapest supplier. Moreover, it may not be straightforward to establish causation for the damages.
We have often also seen claims that the contract should be rescinded. This is available as of right in fully secret commission but is subject to the court’s discretion in half-secret commission claims as was explored in Hurstanger.7 The case law is also clear, that this entails a counter-restitution for the benefit received by the claimant, but leaves ample room for argument as to the valuation of that benefit. In the case of energy contracts, for example, should it be the cost to the claimant on the open market (which may not be all that different or even higher), or perhaps the wholesale cost to the supplier? If so, how is this determined where the supplier may have acquired the energy on a futures basis for a portfolio of actual and potential customers? In any event, it is not an automatic windfall for the claimant who must still pay for its energy.
Further Issues
Where the claim is defended the issues will turn around the relationship between the intermediary and the customer. This is a factual assessment that requires the review of the correspondence, any contractual documents and perhaps even telephone recordings. Each case turns on its facts, however, the case of Wood has made this a more difficult defence, given the low bar that a claimant must meet in fully secret commission claims.
Where the customer is told (whether directly or by reference to the intermediary’s terms and conditions) that the intermediary receives or may receive commission from a third party, this affords the intermediary a defence. First, while commentators disagree, it seems that in half-secret commission claims it is still necessary for the claimant to establish that there was a fiduciary relationship for remedies to be available. Second, it becomes open to the defendant to argue that the claimant, who knew that commission was paid by the third party, “cannot object on the ground that he did not know the precise particulars of the amount paid”.8
Additionally, we are aware of at least one unreported case where the court was prepared to import an assumption that a professional customer of an intermediary knows that where it does not pay the intermediary directly, the intermediary must receive their payment from the energy supplier. This then gives rise to the defence deployed in Medsted, that the claimant cannot object because he did not know the amount of the commission.
Finally, how long must energy suppliers and intermediaries grapple with these types of claims until limitation becomes a bar? The answer likely lies in the description often given to them: secret commission claims. It seems that if pressed, claimants will argue that the defendants concealed from them the facts necessary for them to discover the breach of duty, thereby postponing the start of the 6-year limitation period running until that discovery.9 However, this defence will likely be unavailable in the case of half-secret commissions (because the claimant knows that the intermediary is receiving commission), and subject to the usual challenge that the claimant could with reasonable diligence have discovered the claim sooner.