COMMERCIAL LAW - BRIBES & COMMISSIONS

WHEN CAN AN AGENT KEEP A BRIBE OR A SECRET COMMISSION?

For centuries, judges have vilified bribes and the giver and the recipient of bribes. Senior lawyers have made statements like:

“Bribery is an evil practice which threatens the foundations of any civil society”.

(Lord Templeman – Attorney General v. Reid) [1994] 1 AC 324; and

“Secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world”.

(Lord Neuberger Sinclair Investments v. Versailles Trade Finance) [2012] Ch.453.

One tricky question has always remained. Who is the rightful owner of a bribe that has been paid to an agent? This issue has troubled courts and legal academics for centuries. The debate is centered around whether or not a bribe or a secret commission received by an agent is held on trust for the agent’s principal. If so, the principal has a proprietary right in the agent’s bribe. On the other hand, is the principal’s claim merely a personal one for equitable compensation equal to the value of the bribe or commission? The answer to this question is not simply legal eroticism! The answer could be crucial in litigation against dishonest agents. Unfortunately, bribery is becoming an accepted way of life to third world companies doing business in first and second world countries. Indeed, bribery is becoming increasingly common in third world countries themselves.

Returning to the question framed above, if the bribe is held on trust, the principal can seek injunctive relief, trace the bribe into the hands of a third party, and recover it as trust property. The principal can also claim the bribe as a secured debt in liquidation in preference over unsecured creditors. On the other hand, if the claim is merely for equitable compensation, the best the principal could hope for is to claim against the agent personally and hope the agent still had the funds to pay after legal judgment. For instance, if the agent had passed the funds to a third party, the principal could not trace the funds if the claim was merely for equitable compensation. If the agent was bankrupt or in liquidation, the principal would have no preference over other creditors and would therefore be unlikely to recover all or any of the bribe or secret commission.

In many respects, the second approach to the question (the principal’s claim being a personal one only rather than via a proprietary right) effectively defeats the purpose of the general rule that an agent cannot make a secret profit and, if the agent does, the agent will have to account to its principal for that profit.

This legal debate has recently been resolved by the Supreme Court of the United Kingdom (formerly the House of Lords) in a unanimous decision in FHR European Ventures LLP & Others v. Cedar Capital Partners LLC [2014] UKSC 45. Lord Neuberger, the Lord Chancellor, delivered the Supreme Court’s unanimous decision which held that bribes and secret commissions are held on trust by an agent for its principal. In so doing, the Supreme Court overturned 200 years of precedent to the contrary. The advantage was to bring English law into conformity with the laws that apply in other Commonwealth jurisdictions, especially Canada and India.

In the FHR decision, FHR purchased the share capital of the Monte Carlo Grand Hotel which owned a long lease interest in a hotel. The purchase was from Monte Carlo Grand Hotel Ltd for €211.5 million. FHR’s agent, Cedar Capital Partners, entered into a contract with Monte Carlo Grand Hotel Ltd (the vendor) which provided a payment of €10 million only if the sale was successfully concluded. FHR knew nothing of this side contract. Under the contract between FHR as principal and Cedar Capital Partners as agent, Cedar owed fiduciary duties to FHR who negotiated the purchase of the hotel on FHR’s behalf. The sale was successfully negotiated. Monte Carlo Grand Hotel Ltd paid the €10 million fee to Cedar two weeks after the sale. Inevitably, the secret was released and the principal sued the agent to recover the €10 million fee. The question which ultimately came to the Supreme Court in the United Kingdom was who owned the €10 million fee and on what basis?

At first instance, the trial judge held that Cedar had not made proper disclosure to FHR about the fee. The trial judge decided that he should make a declaration of liability for breach of fiduciary duty of Cedar for failing to obtain FHR’s informed consent in respect of the fee and ordered Cedar to pay this sum to FHR. The trial judge, however, refused to grant FHR a proprietary remedy in respect of the fee.

In the intermediate appeal court, the English Court of Appeal, it was held in a highly complex and somewhat artificial judgment that Cedar had received the €10 million fee on a constructive trust for FHR absolutely which meant that FHR was entitled to the fee as beneficiary.

Cedar appealed to the Supreme Court and lost badly. The Supreme Court effectively found that the usual rule is that where an agent acquires a benefit which came to the agent’s notice as a result of his fiduciary position or thanks to an opportunity which resulted from his fiduciary position, equity requires that the agent is to be treated as having acquired the benefit on behalf of his principal and is therefore beneficially owned by the principal.

The Supreme Court rejected Cedar’s unattractive argument that bribes and secret commissions ought to be exempt from this rule because the sum paid could not have been received by the principal in any event. The Supreme Court concluded that if a bribe or secret commission has been paid, there is a strong possibility it has disadvantaged the principal. In the facts of the case, FHR may well have acquired the hotel for €10 million less if the vendor had not had to pay Cedar the bribe.

The Supreme Court therefore entrenched the rule that a bribe or secret commission accepted by an agent is held on trust for the agent’s principal who is entitled to a proprietary interest in the benefit.

The Supreme Court’s decision, and similar cases decided in Australia, will have significant implications for companies doing business either overseas or in Australia via agents who are tempted to negotiate bribes or secret commissions. These implications are as follows:

The rule is not confined to traditional agent/principal relationships. It will include other types of fiduciary relationships such as trustee/beneficiary, company/director, solicitor/client and public official/members of the public;
The principal may be able to obtain early stage freezing orders and injunctions against the agent and in addition obtain proprietary injunctions to freeze the bribe/commission and their traceable proceeds. If the proceeds have already been passed to a third party, relief may still be available against the third party under the rules of the Supreme Courts of most Australian States and Territories;
The limitation period may not start running as the claim will be that the agent (trustee) holds the sums on trust for the principal (beneficiary). Limitation of action legislation may allow extended times within which the principal can commence an action upon the basis that a principal is recovering from the trustee trust property or the proceeds of trust property in the possession of the trustee or previously received by the trustee and converted to the trustee’s use;
Recovery against corrupt agents has just been made considerably easier. A principal now has the option to trace into the agent’s assets which may be kept in a bank or potentially into the assets of a third party and claim any profits of the fraud such as a return on any investments made with the bribe. If the agent’s investments failed, the principal can still rely on a personal claim against the agent equal to the amount of the original bribe or commission;
If the agent is in liquidation, the principal will rank as a secured creditor ahead off the unsecured creditors due to the fact that the principal’s right of action constitutes a proprietary interest enforcement. The traditional reluctance of courts to confer secured creditorship was outweighed by the general arguments in favour of granting enhanced relief to principals to recover bribes and commissions.

The effect of this decision is that agents who attempted to negotiate and receive bribes and commissions face not only criminal prosecution but an effective way for principals to be able to sue to recover the money. This could mean that not only did the agent face a criminal penalty but also lose the very basis upon which the action had been taken – the bribe itself.

The Supreme Court’s decision also emphasizes the importance for agents of properly disclosing conflicts of interest or side deals which might compromise their loyalty to principals. This should be carefully approved in writing by the principal before the agent proceeds.

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