In July 2014 the Supreme Court of England and Wales handed down a judgment in FHR European Ventures LLP and others v Cedar Capital Partners LLC concerning the enforcement rights which are available in English Courts to the principals of fiduciary agents where the latter have received secret commissions or bribes.
The issue in the case was whether the bribe or secret commission paid to the agent is the property of that agent’s principals, or whether it gives rise to a personal action against the agent in the amount of the bribe or secret commission. The distinction is highly important because the existence of property rights in the bribe or secret commission opens up the availability of powerful tracing and following remedies in English law, including potential rights against third parties to which the money has been paid and, also, potential rights in assets which have been purchased with the illicitly obtained funds.
In December 2004 the Claimants in the action purchased a long leasehold interest in the Monte Carlo Grand Hotel through their joint venture vehicle, FHR European Ventures LLP. Cedar Capital Partners LLP acted as the Claimants’ agent in negotiating the purchase. However, Cedar Capital Partners also entered into a brokerage agreement with the vendor, which provided that it would be paid a €10 million fee by the vendor on conclusion of a sale.
At first instance, it was held that Cedar Capital Partners had not provided proper disclosure of the agreement that it had reached with the vendor. The Court noted that Cedar Capital Partners had mentioned to one of the Claimants that a fee would be paid but without specifying any amount, but the other Claimants had not been told that any fee was payable at all. The first instance Judge held that Cedar Capital Partners had breached its fiduciary duties to the Claimants in not properly disclosing the fee arrangement with the vendor and ordered Cedar Capital Partners to pay such sum to the Claimants. However, the Judge refused to grant a proprietary remedy in respect of the money.
The Claimants appealed to the Court of Appeal seeking an order that Cedar Capital Partners had received €10 million as constructive trustees for the Claimants. They did so because this would mean the Claimants had proprietary rights in that money, which would open up the powerful English law following and tracing remedies. The Court of Appeal upheld this appeal.
Cedar Capital Partners subsequently appealed to the Supreme Court challenging this decision.
In its judgment the Supreme Court commented on the complexity of the law on this issue. However, the Court drew heavily on several fundamental submissions including:
- an agent’s fundamental duty of loyalty to its principals, such that those principals should be beneficially entitled to any unauthorised benefits accrued by the agent.
- there being no clear reasons why an agent who has accepted a bribe or secret commission should face less effective remedies than it would in a case of some other type of unauthorised benefit.
- a single rule which did not distinguish between types of unauthorised benefit would bring clarity and simplicity and avoid disputes about which side of the line a particular type of unauthorised benefit fell.
- as a matter of public policy, the law should discourage bribery and similar behaviour.
The Supreme Court held that its prior decision in Tyrell v. Bank of London (1862) was wrongly decided and that the line of authorities in the Court of Appeal beginning with Metropolitan Bank v. Heiron (1880) and Lister & Co. v. Stubbs (1890) and culminating in Sinclair Investments Ltd v. Versailles Trade Finance Limited (2012) were all to be overruled.
Accordingly, under English law all unauthorised benefits earned by an agent are therefore the subject of a constructive trust held to the benefit of the principal.
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Note: This is a general briefing and not an exhaustive treatment of the subject.