The U.K. Supreme Court ruled this month that principals of agents who receive bribes or secret commissions have a proprietary claim to any such ill-gotten gains received by their agents.
The question before the court was whether secret commissions or bribes received by an agent is held “on trust” for the principal of that agent, or whether the principal merely has a claim for equitable compensation in a sum equal to the value of the bribe or commission.
If the bribe or commission is held on trust, the principal has a proprietary claim to any undisclosed amounts. Thus, in the event the agent goes bankrupt, the principal has a proprietary claim to any repayments ahead of other creditors, and a better chance at recovering ill-gotten gains.
The case, FHR European Ventures v Cedar Capital Partners, arose from a lawsuit filed in 2009 by FHR European Ventures (FHR), a group of investors, against Cedar Capital Partners, a consultancy firm that served as FHR’s agent in negotiating the purchase of the Monte Carlo Grand Hotel in 2004 for €211.5 million. Cedar, however, also had entered into an “exclusive brokerage agreement” with the sellers of the hotel, under which it received a €10 million commission following conclusion of the sale.
In its lawsuit, FHR claimed that Cedar breached its fiduciary duty by failing to disclose the brokerage agreement, and sought to recover the €10 million fee. A lower court judge ruled that Cedar breached its fiduciary duty and ordered it to pay the €10 million fee, but refused to grant FHR a proprietary remedy with respect to the fee.
The Court of Appeal, however, ruled that Cedar received the €10 million commission “on trust,” and the U.K. Supreme Court, in a July 16 ruling, agreed. “The position adopted by [FHR], namely that the rule applies to all unauthorized benefits which an agent receives, is consistent with the fundamental principles of the law of agency,” Lord David Neuberger wrote for the court.
“The agent owes a duty of undivided loyalty to the principal, unless the latter has given his informed consent to some less demanding standard of duty,” Lord Neuberger wrote. “The principal is thus entitled to the entire benefit of the agent’s acts in the course of his agency.”
The court further concluded that a bribe or secret commission paid to an agent constitutes the same type of benefit as a secret profit generated on a transaction in which the agent is acting on behalf of its principal. “The notion that the rule should not apply to a bribe or secret commission received by an agent because it could not have been received by, or on behalf of, the principal seems unattractive,” Lord Neuberger wrote. “The whole reason that the agent should not have accepted the bribe or commission is that it puts him in conflict with his duty to his principal. Further, in terms of elementary economics, there must be a strong possibility that the bribe has disadvantaged the principal.”
The court further reasoned that “wider policy considerations” support the court’s logic. “Concern about bribery and corruption generally has never been greater than it is now,” Lord Neuberger wrote. “Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.”
Anti-corruption experts warn that the ruling may not apply under all circumstances, such as in the event of a criminal investigation. If a company faces prosecution under the Bribery Act for failure to prevent bribery, for example, it may first have to show that it had adequate procedures in place designed to prevent the bribery.