UK Supreme Court · [2014] UKSC 45
An acquisition adviser negotiating a €211.5 million hotel purchase also received a secret €10 million fee from the seller.
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FHR and its joint-venture partners acquired the company that owned a long lease of the Monte Carlo Grand Hotel for €211.5 million. Cedar Capital acted as their agent in negotiating that purchase.
Before completion, Cedar had also agreed with the seller that it would receive €10 million if the sale succeeded. The seller paid that fee in January 2005. The trial judge later found that Cedar had not properly disclosed the arrangement or obtained the buyers' fully informed consent.
Cedar no longer disputed that it had to account for the €10 million. The remaining question was whether the buyers had only a personal claim for an equivalent sum or owned the commission in equity through a constructive trust.
That difference matters if the agent has spent or invested the money, transferred it to someone with knowledge, or entered insolvency. A proprietary claim can support tracing and may rank ahead of ordinary unsecured creditors.
| Personal claim | Proprietary claim |
|---|---|
| Agent owes an amount of money | Principal has an ownership-based interest |
| Usually ranks with unsecured creditors | May take priority over the agent's unsecured estate |
| Recovery focuses on the agent | May support tracing into substitute assets or knowing recipients |
The Court held that a benefit acquired by an agent as a result of the agency and in breach of fiduciary duty is held on trust for the principal. That rule applies to bribes and secret commissions. In reaching that result, the Court treated the contrary approach in Heiron and Lister, and later decisions that followed them, as overruled.
The Court favoured a simple and strict rule for agents generally, not only acquisition advisers. Secret commissions undermine trust in commercial transactions. Treating the payment as the principal's property removes uncertainty and prevents the agent or its creditors benefiting from property that should not have formed part of the agent's estate.
Engagement letters should deal expressly with who may pay the agent, what must be disclosed and who can approve a conflict. A statement that the adviser 'may receive fees' is weak if it does not reveal the amount, payer and effect on the recommendation.
Businesses should apply the same discipline to smaller arrangements such as referral partnerships, marketplace commissions and procurement rebates. The value may be lower, but the conflict is still capable of distorting a recommendation.
Key points
The Supreme Court used the equitable category of bribes and secret commissions. The appeal decided the buyers' civil proprietary remedy, not criminal liability under the Bribery Act.
It can allow the principal to trace the money into substitute assets and may give priority over the agent's unsecured creditors if the agent becomes insolvent.
Potentially, but the principal needs full disclosure and must give properly informed consent. A contract label or general conflicts clause may not be enough if the amount and nature of the interest are hidden.