FHR European Ventures v Cedar Capital: Principal's Interest in Agent's Bribe or Commission | Lecture notes Law

Case: FHR European Ventures LLP & Ors v Cedar Capital Partners LLC, [2014] UKSC

45, SC, 16 July 2014

Synopsis: A principal has a proprietary interest, and not just a right to equitable

compensation, in a bribe or secret commission received by his agent in breach of the

agent’s fiduciary duty. The previous CA decisions in Heiron and Lister, and in Sinclair v

Versailles to the extent it relied on those cases, have been overruled.

Topics covered: Agency, Breach of fiduciary duty, trusts, proprietary

claim.

The Facts

Cedar Capital acted as FHR’s agent in negotiating the purchase by FHR of the Monte

Carlo Grand Hotel. Cedar had also entered into a brokerage agreement with the vendor of

the hotel, pursuant to which Cedar received a commission of EUR 10 million following the

sale to FHR. Cedar had not made proper disclosure of the brokerage agreement to FHR,

which sought to recover the EUR 10 million from Cedar. At first instance, the judge held

that Cedar was liable to pay that amount to FHR, but refused to grant FHR a proprietary

remedy in respect of the money. The CA subsequently held that Cedar did hold the fee on

constructive trust for FHR. Cedar appealed against that finding.

The Decision

Cedar’s appeal was dismissed. The central issue in dispute was the extent to which the

established equitable rule (the Rule) that where an agent acquires a benefit as a result of

his fiduciary position he is to be treated as having acquired the benefit on behalf of his

principal, so that the principal has a proprietary remedy in addition to his personal remedy,

applies where the benefit is a bribe or secret commission. The SC held that it does.

Whilst a number of cases were consistent with the notion that the Rule should apply to

bribes or secret commissions, there were in particular two CA cases from the 19th century

(Metropolitan Bank v Heiron (1880) 5 Ex D 319 and Lister & Co v Stubbs (1890) 45 Ch D

1) which had held that, whilst a principal had a claim for equitable compensation in respect

of a bribe or secret commission paid to the agent, he has no proprietary interest in it.

Although the Privy Council held in AG for Hong Kong v Reid that bribes received by a

corrupt policeman were held on trust for his principal and had disapproved Heiron and

Lister, in Sinclair Investments Ltd v Versailles Trade Finance Limited [2012] Ch 453

(Technical Bulletin 346), the CA (the panel including Lord Neuberger MR, who gave the

judgment of the SC in this case) had decided it should follow Heiron and Lister. The

previous House of Lords decision inTyrrell v Bank of London [1862) 10 HL Cas 26 which

appeared to support the notion that a principal only has a claim for equitable

compensation rather than a proprietary interest in the commission or bribe is no longer

good law.

FHR European Ventures v Cedar Capital Partners LLC -

Principal’s proprietary interest in bribe or secret commission

received by his agent

Technical Bulletin No: 570

Partial preview of the text

Download FHR European Ventures v Cedar Capital: Principal's Interest in Agent's Bribe or Commission and more Lecture notes Law in PDF only on Docsity!

Case: FHR European Ventures LLP & Ors v Cedar Capital Partners LLC, [2014] UKSC 45, SC, 16 July 2014 Synopsis: A principal has a proprietary interest, and not just a right to equitable compensation, in a bribe or secret commission received by his agent in breach of the agent’s fiduciary duty. The previous CA decisions in Heiron and Lister , and in Sinclair v Versailles to the extent it relied on those cases, have been overruled.

Topics covered: Agency, Breach of fiduciary duty, trusts, proprietary

claim.

The Facts Cedar Capital acted as FHR’s agent in negotiating the purchase by FHR of the Monte Carlo Grand Hotel. Cedar had also entered into a brokerage agreement with the vendor of the hotel, pursuant to which Cedar received a commission of EUR 10 million following the sale to FHR. Cedar had not made proper disclosure of the brokerage agreement to FHR, which sought to recover the EUR 10 million from Cedar. At first instance, the judge held that Cedar was liable to pay that amount to FHR, but refused to grant FHR a proprietary remedy in respect of the money. The CA subsequently held that Cedar did hold the fee on constructive trust for FHR. Cedar appealed against that finding. The Decision Cedar’s appeal was dismissed. The central issue in dispute was the extent to which the established equitable rule (the Rule) that where an agent acquires a benefit as a result of his fiduciary position he is to be treated as having acquired the benefit on behalf of his principal, so that the principal has a proprietary remedy in addition to his personal remedy, applies where the benefit is a bribe or secret commission. The SC held that it does. Whilst a number of cases were consistent with the notion that the Rule should apply to bribes or secret commissions, there were in particular two CA cases from the 19th century ( Metropolitan Bank v Heiron (1880) 5 Ex D 319 and Lister & Co v Stubbs (1890) 45 Ch D

which had held that, whilst a principal had a claim for equitable compensation in respect of a bribe or secret commission paid to the agent, he has no proprietary interest in it. Although the Privy Council held in AG for Hong Kong v Reid that bribes received by a corrupt policeman were held on trust for his principal and had disapproved Heiron and Lister , in Sinclair Investments Ltd v Versailles Trade Finance Limited [2012] Ch 453 (Technical Bulletin 346), the CA (the panel including Lord Neuberger MR, who gave the judgment of the SC in this case) had decided it should follow Heiron and Lister. The previous House of Lords decision in Tyrrell v Bank of London [1862) 10 HL Cas 26 which appeared to support the notion that a principal only has a claim for equitable compensation rather than a proprietary interest in the commission or bribe is no longer good law. FHR European Ventures v Cedar Capital Partners LLC - Principal’s proprietary interest in bribe or secret commission received by his agent Technical Bulletin No: 570

The SC held that the following practical and policy considerations favoured a wider application of the Rule, and justified the SC disapproving Heiron and Lister , which accordingly, together with decisions which relied on them, including Sinclair , should be treated as overruled:

Giving a principal a proprietary interest in a bribe or secret commission received by his agent is consistent with the fundamental principles of the law of agency, and the “duty of undivided loyalty” owed by an agent to his principal;
The notion that the Rule applies to all unauthorised benefits an agent receives (so that any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for the principal) has the benefit of simplicity, creating clarity and certainty in the law;
The approach has the advantage of aligning the circumstances in which the agent is obliged to account and those in which his principal can claim beneficial ownership of the benefit;
[37]: “ 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, seemed unattractive. 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” ;
It would be paradoxical if a principal whose agent wrongly received a bribe or secret commission was worse off than a principal whose agent obtains a benefit in far less opprobrious circumstances;
Whilst prejudice to the agent’s unsecured creditors was seen as a good reason in Sinclair for not following Reid , the SC felt that the argument had limited force in the context of a bribe or secret commission. The proceeds of a bribe or secret commission should not be in the agent’s estate at all as he would not have obtained it were it not for his fiduciary position. Potential prejudice to the unsecured creditors was balanced by the fact that it appeared to be just that a principal whose agent has obtained a bribe or secret commission should be able to trace them into the hands of knowing recipients. It also appeared that other common law jurisdictions had adopted the view that the Rule applies to all benefits which are obtained by a fiduciary in breach of his duties. Although courts in those jurisdictions (notably the Australian ones) recognise remedial constructive trusts (which the English courts do not), it seemed to the SC “ highly desirable for all [common law] jurisdictions to learn from each other, and at least to lean in favour of harmonising the development of the common law round the world ”. Comment As the SC noted, the question in issue has excited great academic debate and this case was ultimately decided on legal principle, policy and practicality in the absence of clear legal authority. In reversing the previous approach of the CA in Heiron and Lister , and Sinclair , and preferring the approach of the Privy Council in Reid , the SC has helpfully

FHR European Ventures v Cedar Capital: Principal's Interest in Agent's Bribe or Commission, Lecture notes of Law

Partial preview of the text

Download FHR European Ventures v Cedar Capital: Principal's Interest in Agent's Bribe or Commission and more Lecture notes Law in PDF only on Docsity!

Topics covered: Agency, Breach of fiduciary duty, trusts, proprietary

claim.