The Supreme Court has enhanced the scope for recovery of bribes or secret commissions
The Supreme Court has enhanced the scope for recovery of bribes or secret commissions received by an agent. It is in breach of its fiduciary duty to its principal. Confirming that the principal will have a proprietary claim.
The past few years have seen a marked increase in attempts to tackle bribery and corruption. Within England, this has involved the implementation of legislation. The Bribery Act being the paradigm example. Alongside numerous, often high profile, prosecutions of alleged bribery and corruption offences.
However, it is also the case that innocent parties can be adversely affected. It is increasingly common that litigation will arise out of instances of bribery or corrupt practice. Separate from the criminal and regulatory regimes, the English civil courts provide various private law remedies. This is to parties that have been the victims of bribery and corruption. An important example is the recent Supreme Court decision in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. The case is significant in clarifying and enhancing the rights of a principal against an agent who has received a bribe or secret commission in breach of its duty to the principal.
Decision
The case concerned a claim by investors against an agent in connection with their purchase of Monte Carlo Grand Hotel SAM. An entity which owned a long leasehold interest in the Monte Carlo Grand Hotel. The defendant had acted as the purchasers’ agent in negotiating the acquisition. There was no dispute that it owed fiduciary duties to the purchasers. However, the defendant had also entered into a separate agreement with the sellers pursuant. To which it was to receive a fixed commission of €10 million for securing a buyer.
An agent should not accept a bribe or secret commission. This will put the agent in conflict with its duty to the principal. Subsequent to the transaction, a claim was brought by the purchasers seeking recovery of the €10 million. The judge found that the agent had failed to disclose the existence of this agreement to the purchasers. Subsequently made a declaration of liability for breach of duty.
It is also well established as a matter of English law that where an agent has received a benefit in breach of his fiduciary duty, the agent is obliged to account to the principal. They must pay a sum equal to the profit by way of equitable compensation.
The question for the Supreme Court
The principal was limited to merely a personal remedy of an account and equitable compensation. The purchasers argued that they also fell within the equitable rule. Where an agent acquired a benefit that came to his notice in consequence of his fiduciary role, the agent was to be treated as having acquired the benefit on behalf of the principal. In such cases, the principal had a proprietary remedy in addition to the personal one.
In a single judgment delivered by Lord Neuberger, the Supreme Court confirmed that where an agent has received a bribe or secret commission in breach of its fiduciary duty, the bribe or secret commission is held on trust for the principal and the principal has a proprietary claim to it.
Implications
The decision is an important one in providing much needed clarification to this area of the law. However, its importance is far wider than simply settling a long running academic debate on this issue.
At a practical level, the fact that a principal has the option of a proprietary claim makes recovery much easier. First, the principal will be in a better position than the agent’s other unsecured creditors. With the result that the prospects for successful recovery will not automatically depend on the solvency of the defendant. Other creditors might consider themselves prejudiced by this outcome, the Supreme Court noted that the proceeds of a bribe or secret commission should not be in the agent’s estate at all because the bribe or commission would often have reduced the principal’s benefit from the relevant transaction and therefore could fairly be seen as his property.
Further, the Court considered that it was just that 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. To follow them into the hands of knowing recipients. This means that a principal will not be denied a remedy. Simply by virtue of the agent disposing of or dissipating all of its assets.
Finally…
The decision is also significant in that it aligns, in a private law context, with the broader policy of seeking to combat bribery. It is notable that Lord Neuberger made express reference to the words of Lord Templeman in Attorney General for Hong Kong v Reid [1994] 1 AC 324, that ‘[b]ribery is an evil practice which threatens the foundations of any civilised society’. Lord Neuberger went on to state that ‘[t]hat has always been true, but concern about bribery and corruption generally has never been greater than it is now. One would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.’
In the strengthening of the principal’s rights as opposed to an agent who has obtained a bribe or secret commission. The decision of the Supreme Court arguably represents a further step in the wider goal of tackling bribery and corruption.