Supreme Court confirms secret commission held on trust by agent for buyer

What is the remedy for a buyer whose agent acquires a secret commission from the seller? The Supreme Court decided that a bribe or secret commission accepted by an agent is held on trust for his principal. Here the secret commission was obtained by the agent of the buyers of the Monte Carlo Grand Hotel.

Original news

In FHR European Ventures v Cedar Capital [2013] UKSC 45, an agent received a ‘secret commission’ from the seller of the Monte Carlo Grand Hotel where his principal had bought it at a price negotiated on his behalf by the agent.

An investor group bought the share capital in the hotel. The price was negotiated by Cedar who, without notifying the buyers, had entered into an exclusive brokerage agreement with the seller, earning it 10 million euros in commission from the seller.

The High Court had decided that the buyers were only entitled to a personal remedy of an account in equity. The Court of Appeal allowed the buyers’ appeal deciding that they were entitled to the proprietary remedy of a constructive trust in the commission paid to Cedar.

The Supreme Court dismissed the appeal against the Court of Appeal’s decision.

What is the law in this area?

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 general equitable rule (the Rule) is that he is to be treated as having acquired the benefit on behalf of his principal, so it is beneficially owned by the principal.

The dispute here was the extent to which the Rule applies where the benefit is a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal. Is the commission held on trust for the principal, pursuant to the Rule, or does the principal merely have a claim for equitable compensation in a sum equal to the value of the bribe or commission?

Why did the type of remedy matter?

If the bribe or commission is held on trust, the principal has a proprietary claim to it, whereas if the principal merely has a claim for equitable compensation, the claim is not proprietary.

The distinction is important for two main reasons:

  • if the agent becomes insolvent, a proprietary claim would give the principal priority over the agent’s unsecured creditors
  • if the principal has a proprietary claim to a bribe or commission, he can trace and follow it in equity

Arguments

Cedar argued that the Rule should not apply to a bribe or secret commission paid to an agent, because it is not a benefit which can properly be said to be the property of the principal.

FHR argued that the Rule does apply to bribes or secret commissions received by an agent, because, in any case where an agent receives a benefit, which is, or results from, a breach the fiduciary duty owed to his principal, the agent holds the benefit on trust for the principal.

What did the Supreme Court decide?

The Supreme Court confirmed that while it was not possible, as a matter of pure legal authority, to identify any plainly right or plainly wrong answer to the issue of the extent of the Rule, considerations of practicality and principle supported the case that a bribe or secret commission accepted by an agent is held on trust for his principal, rather than merely giving rise to a claim for equitable compensation.

What are the lessons for lawyers?

The Supreme Court decision has provided welcome clarity.

In making its judgment, the Supreme Court confirmed that previous decisions, not supporting the case that a bribe or secret commission accepted by an agent is held on trust for his principal, should be treated as overruled.

Filed Under: Property

Relevant Articles
Area of Interest