Supreme Court considers whether a bribe or secret commission received by an agent is the property of the principal

​In HR European Ventures LLP & ors v Cedar Capital Partners LLC [2014] UKSC 45, 16 July 2014, the Supreme Court held that bribes and secret commissions, received by an agent, should be treated as the property of the principal and do not merely give rise to a claim for equitable compensation. In so doing, the court overruled earlier decisions including Sinclair Investments Ltd v Versailles Trade Finance Ltd [2012] Ch 453. This has simplified a complex area of the law and gives a principal priority over the claims of other creditors in the event of an agent's insolvency.

Background

Cedar Capital Partners LLC (Cedar) acted as agent for FHR European Ventures LLP (FHR) in negotiating FHR's purchase of Monte Carlo Grande Hotel SAM. However, Cedar also entered into an agreement with the vendor under which Cedar was paid EUR 10 million after the successful completion of the transaction.

Breach of fiduciary duty

At first instance, Simon J held that Cedar was in breach of the fiduciary duty it owed, as agent, to FHR, as principal, by failing to obtain FHR's properly informed consent to the EUR 10 million payment. Cedar was ordered to pay the sum of EUR 10 million to FHR but FHR was refused a proprietary remedy1. On appeal, the Court of Appeal took the opposite view and made a declaration that Cedar received the EUR 10 million as constructive trustee for FHR2.

Liability to account for the benefit: equitable compensation or constructive trust?

The single issue before the Supreme Court was whether the remedy available to FHR against Cedar was a personal one for a sum equal to the EUR 10 million payment by way of equitable compensation or a proprietary one based on the argument that Cedar received the payment as constructive trustee. From a principal's point of view, a proprietary claim is preferable because it puts a principal in a stronger position than other creditors in the event of the agent's insolvency.

"The Rule"

Neuberger LJ referred to the well-established principle that where an agent receives a benefit in breach of his fiduciary duty, he is liable to account for that benefit and pay to the principal a sum equal to the profit by way of equitable compensation. The focus of the appeal was the equitable rule (the Rule) that in some cases where an agent has acquired a benefit in breach of his fiduciary duty, he is treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal and the principal has a proprietary remedy in addition to his personal remedy against the agent. The issue was whether the Rule applies where the benefit in question is a bribe or secret commission.

The arguments of the parties

Cedar argued that the Rule should not apply to a bribe or secret commission because it is not a benefit which could properly be said to be the property of the principal (ie it had not derived from the principal's property or opportunities within the scope of the agency). FHR's case was based on the argument that equity will not allow the agent to rely on his own breach of fiduciary duty to justify retaining the benefit of a bribe and will assume that he acted in accordance with his duty.

Earlier cases – a conflicting picture

The court considered a raft of 19th century authority that any benefit received in breach of fiduciary duty was held by the recipient on trust. However, the House of Lords took the opposite view in Tyrrell v Bank of London (1862) 10 HL Cas 26 in which a client was held not to have a proprietary claim in respect of an interest in land because it had been acquired by the solicitor "outside the limit of the agency". Similarly, in Metropolitan Bank v Heiron (1880) 5 Ex D 319 a bribe paid to a company director was not considered by the Court of Appeal to be "money of the company" and in Lister & Co v Stubbs (1890) 45 Ch D 1 an employer had no proprietary interest in a bribe paid to an employee, as their relationship was as creditor and debtor (personal) and not beneficiary and trustee (proprietary).

This was followed in subsequent decisions but not by the Privy Council in Attorney General for Hong Kong v Reid [1993] UKPC 2 which took the view that, consistent with the principle that a fiduciary must not be allowed to benefit from his own breach of duty, a bribe was held on trust. However, in the recent decision of Sinclair the Court of Appeal once again followed Heiron and Lister.

Policy and practical arguments

Having concluded that it was impossible to determine the extent of the Rule based solely on previous authorities, the court turned to arguments of principle and practicality. Clarity and simplicity, the court said, are highly desirable qualities in the law and FHR's formulation of the Rule had that advantage and also aligned the circumstances in which an agent had to account for the benefit and those in which the principal could claim the beneficial ownership of it. The suggestion that the Rule should not apply to a bribe or secret commission because the principal could not have received it, seemed "unattractive" and would have the result that the principal of an agent who received a bribe would be worse off than the principal of an agent who received a benefit in breach of his fiduciary duties in far less opprobrious circumstances.

From a policy perspective, the court felt that bribery and secret commissions are objectionable and undermine trust in the commercial world and the law should be particularly stringent in dealing with them. The suggestion that a wide application of the Rule would prejudice the unsecured creditors of an insolvent agent was rebutted on the ground that a bribe or secret commission is property which should not have formed part of the agent's estate in the first place.

Decision

Taking the view that the law "took a wrong turn in Heiron and Lister", the Supreme Court unanimously dismissed Cedar's appeal, holding that FHR had a proprietary claim to the EUR 10 million commission.

Comment: This decision has simplified what was previously a very complex area of the law. The court has disapproved the decision of the House of Lords in Tyrrell, and overruled the decisions in Heiron and Lister (and subsequent decisions to the extent they were based on these cases, including Sinclair).

The new rule is that in all cases where an agent has acquired a benefit in breach of his fiduciary duty, he is treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal. It is not necessary for the benefit to be derived from the property of the principal for the benefit to be held on trust.

The practical effect is that a principal will be able to elect between a personal and a proprietary remedy. If the value of the benefit has decreased, he will have a personal claim for the original sum. If the value has increased, he can opt to claim the benefit and any profit.

The principal will also be able to trace the proceeds of the bribe or secret commission into other assets and follow them into the hands of knowing recipients. In the event of the insolvency of the agent, the proprietary claim will afford the principal priority over the claims of unsecured creditors.

Footnotes:

1. [2012] 2 BCLC 39 and [2013] 2 BCLC 1.

2. [2014] Ch 1.