The use of commercial agents to negotiate sales is a common phenomenon in the luxury industry. If an agent to a luxury property buyer takes a bribe or secret commission, does the principal have a proprietary or merely a personal claim against him? Dr Alan Ma finds the answer in a recent Supreme Court case.
When instructing an agent or a solicitor, you may well take it for granted that they will act in your best interests at all times, placing professional duty above any potential personal gains. This important legal concept, known as fiduciary duty, was aptly defined by Lord Millett in the case of Bristol and West Building Society –v- Mothew; “A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.” The fiduciary’s obligation to behave with integrity at all times means that they must attain express consent from you (the principal) before seeking to make any sort of profit from your professional relationship. Needless to say though, fiduciary duty is not always upheld, and there is certainly legislation in place to protect you should your agent turn out to be less than trustworthy. Where an agent breaches their fiduciary duty by accepting a bribe or secret commission, they are obliged to account to the principal with a sum equal to the profit gained. However, should the acquired monies be held by the agent on trust for his principal or does the principal merely have a claim for equitable compensation in a sum equal to the value of the bribe or commission? It was precisely this much-debated question that the courts set out to resolve in FHR European Ventures LLP and others v Cedar Capital Partners LLC (2014).
In December 2004, FHR European Ventures LLP purchased the share capital of Monte Carlo Grand Hotel SAM from Monte Carlo Grand Hotel Limited for €211.5m. Cedar Capital Partners LLC, which provided consultancy services to the hotel industry, had acted as the FHR’s agent for the transaction. However, Cedar had also entered into a secret agreement with the seller whereby Cedar would be paid €10m following the successful completion of the sale and purchase of the issued share capital of Monte Carlo Grand Hotel SAM. The seller paid Cedar the €10m in January 2005, however, in November 2009 the claimants commenced an action for the recovery of the above monies on the grounds that Cedar had breached their fiduciary duty. Initially, the court ordered Cedar to pay the claimants €10m in compensation but refused to grant the claimants a proprietary remedy in respect of the monies. FHR successfully appealed to the Court of Appeal, who decided that Cedar had received €10m on constructive trust for FHR and that the latter had a proprietary interest in the monies. Although Cedar appealed the decision, the appeal was later dismissed at Supreme Court level. They found the position adopted by the respondents to be consistent with the fundamental principles of the laws of agency. It was decided instead that bribes and secret commissions received by an agent should be treated as the property of his principal, rather than merely giving rise to a claim for equitable compensation.
Dr Ma’s Remarks
The distinction between proprietary and personal claims is important because, in the event that your agent becomes insolvent, a proprietary claim gives you priority over the agent’s secured creditors. A principal with a propriety claim is also able to trace or follow it in equity. Here, the Court of Appeal’s decision shows that where an agent exploits his fiduciary position to acquire a benefit, he is to be treated as having acquired the benefit on behalf of the principal and not himself. As such, the benefit is treated as being beneficially owned by you and not your agent. Such a stringent legal approach towards bribes and secret commissions is important for the maintenance of an honest commercial environment.
Dr Alan Ma, Founder and Partner Maxwell Alves Solicitors, London and Edinburgh,www.maxwellalves.com