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Effect of agent's surreptitious dealing

 

31 March 2015

In Tigris International NV v China Southern Airlines Co Ltd & anr [2014] EWCA Civ 1649, 17 December 2014, the Court of Appeal confirmed, obiter, that when a contract is terminated because of a party's surreptitious dealing with the terminating party's agent, it is not void ab initio in circumstances where the misconduct occurs during the performance of the contract, rather than at the time that the contract was entered into.

Background – a joint venture to sell aircraft to Iran

The claimant, Tigris International NV (Tigris), was a joint venture vehicle set up by Mr Koolhaas and Mr Pakdaman to purchase six aircraft from the defendant, China Southern Airlines (CSA), and subsequently sell those aircraft in Iran. Mr Koolhaas was a director of Tigris; Mr Pakdaman was not. Simon J at first instance described the set up as a "delicate commercial transaction": Tigris had no commercial or financial substance, and given that Iran was subject to UN sanctions, Tigris knew that CSA would not be willing to sell aircraft whose ultimate destination was Iran.
Tigris itself had no way of fulfilling its obligations under the aircraft purchase agreements, and so the success of the venture depended on Tigris securing – through Mr Pakdaman's contacts – back-to-back contracts that would fund the deposits and the balance of the purchase price paid for the aircraft by Tigris to CSA. Broadly, it was agreed that Mr Koolhaas would be responsible for the purchase of the aircraft, and Mr Pakdaman would be responsible for sales in Iran. Tigris was represented by Mr Ventner in relation to all technical aspects, in exchange for a percentage of the net profits.

Four days after the parties formally entered into the aircraft sale agreement, Tigris failed to meet certain of its contractual obligations. Mr Koolhaas and Mr Pakdaman fell out "spectacularly". Tigris alleged that Mr Pakdaman, without the knowledge of Tigris or Mr Koolhaas, had entered into a secret agreement with CSA to divert the sale contracts, so that five out of the six aircraft would be sold to another company that was linked to him and Mr Ventner.
Tigris asserted that Mr Pakdaman's surreptitious dealing with CSA amounted to a repudiatory breach of contract, which it purported to accept as termination of the contract. Two weeks later, CSA terminated the aircraft sale agreement on the basis of breaches by Tigris.

Tigris brought proceedings in the High Court claiming return of the deposit it paid under the aircraft sale agreement and damages against CSA. CSA counterclaimed. At first instance, Simon J held that there had not been a repudiatory breach that would entitle Tigris to terminate the contract, and that instead the contract had been rightfully terminated by CSA, whose counterclaim was largely successful. Tigris appealed.

Was there surreptitious dealing?

The Court of Appeal considered whether there had been surreptitious dealing between Mr Pakdaman and CSA. Clarke LJ considered Panama and South Pacific Telegraph Co v India Gutta Percha Telephone Works Co [1875] 10 Ch App 515, the leading authority on the situation where a party whose agent has been bribed to enter into a contract may rescind that contract when the bribery is discovered. "Surreptitious dealing" was not defined in Panama, but Clarke LJ considered it to mean behaviour which amounted to bribery (not alleged against CSA in this case) and that was regarded as fraudulent and dishonest.

Having reviewed the evidence, Clarke LJ upheld the first instance decision that there was no surreptitious dealing and no secret agreement between Mr Pakdaman and CSA. CSA had not acted in bad faith, rather it had dealt with Mr Pakdaman on the basis that the agreement was with Tigris and that if it was to be transferred from Tigris, Mr Koolhaas would be involved. Therefore, Clarke LJ held that CSA had not acted in a way that amounted to surreptitious dealing and as such there had been no repudiatory breach of contract.

Consequences of surreptitious dealing during the performance of a contract

Clarke LJ considered, obiter, whether, if CSA had repudiated the contract by its conduct, it would nevertheless have been entitled to damages for Tigris' breaches [142-144]. The principle established by Panama is that, if the agent is bribed to enter into the contact, the principal may rescind ab initio. Clarke LJ summarised the position as follows: "This line of authorities […] establishes [...] that the remedies available to the principal of an agent bribed or offered a secret commission by his counterparty include the following. If the agent is bribed to enter into the contract the principal may rescind it ie avoid it ab initio, provided that counter restitution can be made and the right has not been lost eg by delay. This is rescission properly so called – an equitable remedy. If, after the contract has been entered into, the agent is bribed in the course of its performance, the principal may bring it to an end as from the moment of discovery ie for the future. The same applies if the bribery was effected at the time of the contract but for some reason (delay, impossibility of counter restitution, rights of bona fide third parties etc) rescission ab initio is impossible […] At law bribery, whether at or after contract, amounts to a repudiatory breach by the bribing party which, on discovery, his counterparty may accept as bringing the contract to an end. Whether that is because bribery is a stand-alone ground for termination, or the obligation to restrain from it an incident or an implied term of every contract is debatable and, for present purposes, does not matter." Applying this principle, if Tigris were to have validly accepted a repudiation, it would only be entitled to rescind the contract for the future. As such, Tigris would have had to give credit to CSA for any right to damages that it had accrued before the contract was terminated.

Comment:

When an agent defrauds its principal in conjunction with the contractual counterparty, both legal and equitable remedies may be available. Panama and the cases that have followed have established the principle that if the agent defrauds its principal to enter into a contract, that contract can be rescinded ab initio. This decision by Clarke LJ complements this line of authorities by clarifying that, if a contract is terminated by a party because of surreptitious dealing between its agent and the counterparty and during the course of performing the contract, that contract can only be rescinded for the future, meaning that the principal will remain liable to the counterparty for any obligations, for example a right to damages, which have already accrued.

The principles set out in this case in respect of agents' fiduciary duties are likely to be persuasive authority for cases that involve allegations of bribery. In circumstances where a party discovers that a contract has been infected by bribery during the course of its performance, a court may now be more inclined to grant termination for repudiatory breach than to award rescission. However, where restoration is possible (for example, because it is for a straightforward recovery of payments made), the victim of a bribe may be able to rescind and be restored to its pre-contractual position. In such circumstances, the victim of the bribe should take care not to act in a way that would bar rescission, for example by affirming the contract.

 

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