Tue 22 Jul 2014

Agency: Supreme Court rules on bribes and secret commissions

On 16 July 2014 the Supreme Court issued its decision in FHR European Ventures LLP and others v Cedar Capital Partners LLC [2014] UKSC 45. The question for the court was a difficult one: where an agent receives a bribe or a secret commission is that the property of the principal (i.e. held on trust for him) or is it the agent's property and the principal only has a claim for equitable compensation against the agent? The answer is important because it affects the nature of the remedy available to the principal.

It may come as a surprise to some of you that this is a question which has troubled the courts numerous times in the past 200 years and, as Lord Neuberger outlined in delivering the judgement of the court, has resulted in a lot of inconsistent judicial decisions. It has also resulted in numerous contradictory articles in academia on the subject. So, it was time to clarify the law for both agents, principals and indeed for insolvency practitioners dealing with the estate of a bankrupt agent (as it is often in that context that the problem arises).

The facts in this case were relatively brief. FHR (the principal) had bought the share capital of the Monte Carlo Grand Hotel for €211.5m. Cedar Capital had acted as agent in negotiating the purchase. In that capacity (and like any commercial agent) it owed FHR fiduciary duties. However, Cedar still thought that making some money on the side was a good idea. So it entered into an agreement with the hotel to the effect that, if the deal went through, the hotel would pay Cedar €10m for arranging it.

The Court started by saying that the principal's right to seek an accounting from his agent undoubtedly gives FHR a right to equitable compensation for the bribe. That would be valued in the quantum of the bribe.  However, in some cases, where an agent acquires a benefit which came to his notice as a result of the fiduciary position as agent then the equitable rule is that he is treated as having acquired the benefit on behalf of his principal. Accordingly, the benefit is the property of the principal rather than that of the agent. The dispute in this case surrounded the extent of that rule (i.e. in what circumstances the principal could claim a proprietary right in the benefit).

As a matter of legal principle, FHR argued that it applied to all benefits received by an agent in breach of duty on the basis that an agent ought to account for any benefit he has obtained as a consequence of his agency. Equity does not permit an agent to rely on his own wrong to justify retaining the benefit and the money was the property of the principal. Cedar argued that the rule should not apply to a benefit which the agent had obtained by taking advantage of an opportunity which arose as a result of the agency, unless the opportunity was the property of the principal. Unusually the Court found that there were such significant legal authorities supporting both arguments that the matter could not be decided purely with reference to legal authority. Neither argument was obviously right or wrong.

The Court then turned to the arguments of the parties based on principle and practicality. It took its starting point as this - "The position adopted by the respondents, namely that the rule applies to all unauthorised benefits which an agent receives, is consistent with the fundamental principles of the law of agency". Nonetheless, it accepted that there was also force in the notion advance by the appellant that the rule should not apply to a bribe or secret commission. If the agent made a secret profit on the transaction then the matter would be different because that is something that the principal should have received the benefit of. However, the same was not true of a bribe.

The Court was, however, ultimately persuaded by FHR. It pointed out that, their explanation was the simplest solution and clarity and simplicity are highly desirable qualities in the law, especially in circumstances like the present when there was no obviously right answer. FHR's position also aligned the circumstances in which an agent was obliged to account for any benefit received in breach of duty and those in which the principal could claim the beneficial ownership of the benefit, which was helpful to the Court in reaching its decision.

But there were other reasons too why the Court fell on the side of the principal. The Court pointed out that the bottom line was that the agent should simply not have accepted the bribe because it put him in conflict with his principal. There were also economic reasons which suggested that, by accepting the bribe, the agent had disadvantaged the principal. It was explained that, in this case the price of the shares was €211.5m. The agent was getting a bribe of €10m. It was perfectly possible that if the hotel did not have to pay the agent the €10m, it would have reduced the price of the shares by the same value. Accordingly, even on the basis of simple economics, the argument for FHR made more sense.

The Court also considered (following argument from FHR) that Cedar's position was paradoxical. If the principal has a right in property then he is better off and the agent is worse off. If the principal just has a claim for equitable compensation then the agent is better off than the principal. So, it would be strange indeed if a principal whose agent wrongly receives a bribe or secret commission is worse off than a principal whose agent obtains just obtains a benefit in circumstances which are far less scandalous. That would be the result of Cedar's argument and it could not be right.

There were policy considerations which supported FHR's argument too. For example, bribes or secret commissions tend to undermine trust between commercial parties. The Bribery Act is just one of a number of measures put in place to ensure that it happens less and less. Indeed the courts themselves have deprecated the practice in Attorney General for Hong Kong v Reid [1994] 1 AC 324 in which Lord Templeman said that "bribery is an evil practice which threatens the foundations of any civilised society".

There was, according to the Court, one difficulty in finding for the principal which related to unsecured creditors of an insolvent agent. Clearly, if the money was not the property of the agent then there would be nothing for his unsecured creditors. But the Court pointed out that the reality was that the money was never the agent's in the first place. So, the unsecured creditors were not, on one view at least, being prejudiced at all. The force of an argument in relation to the rights of unsecured creditors would be much greater when the payments argued about were not a bribe or a secret commission but a benefit obtained in other circumstances by the agent.

Accordingly, the Court ruled that a bribe or secret commission always remains the property of the principal. It is held on trust by the agent for him and the Court's decision is a very welcome clarification for all of dealing with agents and principals on a daily basis.

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