Supreme Court decision in ‘FHR European Ventures v Cedar Capital Partners’ – bribes and secret commissions accepted by an agent (as a fiduciary) are held on trust for the principal – an important clarification

This case was the subject of a previous Blog; the hearing of the appeal being heard 17 to 19 June 2014, which was available for viewing on the live feed of the UK Supreme Court.

In the above decision, Lord Neuberger has confirmed at paragraph 7 (page 4 of the judgment) that a principal has a right to an account and equitable compensation for a bribe or secret commission. It was also recognised that where an agent acquires a benefit in breach of fiduciary duty, the relief is primarily restitutionary or restorative, rather than compensatory. As previously explored, restitutionary responses (as here) involve the agent giving back the enrichment received at the expense of the principal, as opposed to merely confining the principal to a claim for compensation for loss – probably by way of the personal claim only. This decision is much more expansive remedially.

The basic rule, according to FHR European Ventures’ should now be that an agent who obtains a benefit in breach of his fiduciary duty to his principal holds that benefit on trust for his principal. Equity for the present day (common law and equity having been fused since the Judicature Act 1873) has recognised the existence of a new proprietary right against agents in receipt of bribes or secret commissions.

At paragraph 7 of the Judgment it was further emphasised that the agent’s duty to account for the bribe or secret commission was a personal remedy in favour of the principal, against the agent.
The second important clarification made at paragraph 7 concerned the ‘equitable Rule’, which was stated to be that where a benefit is acquired by the agent as a result of his fiduciary position:
‘…the equitable 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.’ (end of paragraph 7).

What are the practical implications? The practical implications for Universities
The Judgment covers much more of interest than what follows of course, however some of the general commentators have drawn out the following significant practical implications:

Firstly, the rule is not confined to agents and principals per se. The net is cast over other recognisable fiduciary relationships – employer-employee, company director, and persons acting in an official capacity, and of trustees acting under a formal trust. Universities are not uniquely affected by this change, but should audit transactions that involve potential conflicts of interest including any parties in transactions receiving commissions.

Secondly, full blown proprietary claims, coupled with the process of tracing (tracing as the process identifying the enrichment, which is now proprietary, and following substitutions of the property, in whatever form that substitution might take) can be made in the usual way, including tracing into the hands of third parties; subject to the usual defences for recipients of bona fide purchase. The proof of the existence of a proprietary base, following an agent’s receipt of a secret commission, would include the concurrent liability of the agent to a personal claim. Claimants could opt for making either a personal or a proprietary claim, depending upon the particular facts of the case.

All the usual remedies will remain, including Freezing orders, but would now be used in tandem with remedies for preserving proprietary interests.

Finally, agents in light of the confirmation that there is a proprietary base (inferred from the agent’s fiduciary status) in bribes and commissions, will need to inquire thoroughly into conflicts of interest that could arise from payments, or where possible, seek formal consent from principals to the receipt of any commissions. This is not a change unique to Universities, but highlights the need for parties to make detailed enquiries as to potential conflicts, and whether consents have been granted regarding commission payments. This would include enquiries from parties along the line of any transaction in which a University is involved where there is likelihood of commission payments. Once tracing has done its work, a Claimant wronged party can now hook the property or its value back from any party in the chain or into whose hands the property or its value has been traceably and survivably received – subject to defences.

The concern (‘traceable’ all the way back to Lister v Stubbs and further) that a proprietary claim against an agent was wrong and was never part of the law, for it would mean that unsecured creditors claims against an insolvent agent would be trumped by the proprietary claim of the principal; has been rejected. Lister v Stubbs, for good or ill, has been overruled.

FHR European Ventures Press Summary:

Click to access UKSC_2013_0049_PressSummary.pdf

FHR European Ventures v Cedar Capital: Judgment

Click to access UKSC_2013_0049_Judgment.pdf

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