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Principal’s interest in agent’s bribes and secret commissions: FHR European Ventures LLP v Cedar Capital Partners LLC (2014) UKSC 45

06-August-2014 16:37
in General
by Admin

The question for the Supreme Court was whether a bribe or secret commission received by an agent is held by them on trust for his/her principal, thus giving rise to a proprietary interest, or whether the principal simply has a claim for equitable compensation equivalent to the value of the bribe or secret commission.

The facts of the case were that on 22 December 2004, FHR European Ventures LLP (“FHR”), the claimants’ vehicle, purchased the issued share capital of Monte Carlo Grand Hotel SAM from Monte Carlo Grand Ltd (“the Vendor”) for €211.5 million. Cedar Capital Partners LLC (“Cedar”) provided consultancy services to the hotel industry. Cedar acted as the claimants’ agent in negotiating the purchase of the issued share capital and, in turn, owed fiduciary duties to the claimants.

In addition, and unbeknownst to the claimants, Cedar had entered into an agreement with the Vendor (“the Exclusive Brokerage Agreement”) dated 24 September 2004. The Vendor paid Cedar €10 million, on or about 7 January 2005, following the sale and purchase.

On 23 November 2009, the claimants began proceedings for recovery of the €10 million from Cedar (and others).  At first instance, Simon J concluded that he should:

1)      make a declaration of liability for Cedar’s breach of fiduciary duty due to failing to obtain the claimants’ fully informed consent with regards the multi-million pound fee;

2)      order Cedar to pay €10 million to the claimants;

3)      refuse to grant the claimants a proprietary remedy in respect of the monies.

The claimants appealed the last element of the decision. The Court of Appeal allowed the claimants’ appeal and made an order that included a declaration that Cedar received the fee on constructive trust for the claimants absolutely.  It was this issue that formed the sole basis of Cedar’s appeal to the Supreme Court.

Giving the judgment of the Supreme Court, Lord Neuberger confirmed the equitable rule that:  “…at least in some cases where an agent acquires a benefit which came to his notice as a result of his fiduciary position, or pursuant to an opportunity which results from his fiduciary position, the equitable rule (“the Rule”) is that he is to be treated as having acquired the benefit on behalf of his principal, so that it is beneficially owned by the principal. In such cases, the principal has a proprietary remedy in addition to his personal remedy against the agent, and the principal can elect between the two remedies” [7].

The appellant’s appeal essentially centred on the submission that the Rule could not apply to a bribe or secret commission paid to an agent as “…it is not a benefit which can properly be said to be the property of the principal” [10].

Having reviewed existing case law in some depth, Lord Neuberger concluded that the majority of cases supported the notion that the Rule “…should apply to bribe or secret commissions paid to an agent, so that the agent holds them on trust for his principal, rather than simply having an equitable duty to account to his principal” [21].   

The justifications for the extension of the Rule focused on two central contentions, that:

1)          an agent ought to account to his principal for any benefit he has obtained in breach of his fiduciary duty, and in order to give legal effect to this account of profits the benefit must be the property of the principal [30 and 33]; and

2)          equity does not permit an agent to rely on his own wrong to justify retaining the benefit. In effect, he must accept that, as he received the benefit as a result of his agency, he acquired it for his principal [30].

After noting the academic debate flowing from the issue on appeal, the Supreme Court found convincing the simplicity of the respondents’ argument that any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for the principal.

The Court also recognised that wider policy considerations supported the respondents’ case, quoting Lord Templeman in the Privy Council case of Attorney General for Hong Kong v Reid“[b]ribery is an evil practice which threatens the foundations of any civilised society” ([1994] 1 AC 324, at 330H). Bribes and secret commissions also undermined trust in the commercial world [42], and were likely to disadvantage principals [37]. As to the disadvantage caused to principals, on the facts of the case in question, common sense dictated that if the Vendor had not paid Cedar €10 million, the Vendor’s asking price might well have been €201.5 million as opposed to €211.5 million [37].

In dismissing Cedar’s appeal, the Supreme Court’s ruling that bribes and secret commissions are held on trust by an agent for his principal is of real significance. The decision provides welcome simplification and clarification of the Rule, the extension of which will prove extremely important where agents become insolvent since principals will be given priority over unsecured creditors and be able to elect to trace the bribe or secret commission.

References in square brackets are to paragraphs in the judgment.

The full judgment can be found here.

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