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UK Supreme Court decision clarifies potential for recovery of bribes from insolvent agents, says expert

Out-Law News | 28 Jul 2014 | 10:47 am | 4 min. read

The ability of firms to recover bribes and damages from their agents ahead of other creditors if the agent becomes insolvent has been restored by a decision of the UK's Supreme Court, an expert has said.

William Christopher of Pinsent Masons, the law firm behind Out-Law.com, said that the decision by the UK's highest court had confirmed that a bribe paid to an agent was a "proprietary asset" of that agent's principal. As well as giving the principal prior rights over the bribe, the decision also restored the ability of the principal to obtain proprietary injunctions to freeze the bribe or anything derived from that asset, and disclosure orders compelling the agent to disclose what it had done with the bribe, he said.

"The decision is important because it means that all profits generated from a bribe can also be claimed by the principal of the bribed agent, and that the bribe can be traced and followed into the hands of third parties and into assets acquired with it," he said. "It also means that the bribe does not fall into an insolvent agent's estate, so it does not have to be shared equally with the other creditors."

The Supreme Court had been asked to rule on whether bribes or secret commissions received by agents should be treated as holding the amount on behalf of, and so on trust for, their principals. Previous rulings on the issue said that this rule applies when agents acquire benefits as a result of their fiduciary position; however, these cases were inconsistent on the question of whether bribes or secret commissions counted as benefits. Agents can owe 'fiduciary duties' to the people or organisations they work for, meaning that they must put the interests of the principal first.

The agent's principal has a proprietary claim over amounts held on trust, meaning that in the event of insolvency of the agent the principal is entitled to repayment ahead of other creditors. Principals only have a personal claim for equitable compensation against their agents for assets not held on trust.

The dispute related to the 2004 purchase of the Monte Carlo Grand Hotel by a group of investors, FHR European Ventures LLP (FHR), for €211.5 million. Cedar Capital Partners was a consultancy which acted as FHR's agent in negotiating the purchase of the hotel. However, Cedar had also entered into an 'exclusive brokerage agreement' with the sellers of the hotel, under which it received a €10m fee on conclusion of the sale.

In November 2009, FHR began an action to recover the €10m from Cedar in the High Court on the basis that the consultancy had breached its fiduciary duties by failing to disclose the agreement. Although the judge ruled in FHR's favour, he found that the investors' claim in relation to this fee was not a proprietary one. This was overturned by the Court of Appeal, the decision of which has now been confirmed by the Supreme Court.

In the judgment Lord Neuberger said that it was impossible to answer the question by referring to previous legal authority due to the conflicting nature of these decisions. Instead, he said that it was necessary to consider "arguments based on principle and practicality" and then address the issue. Although there was "some force" in the idea that the general rule should not apply to bribes or secret commissions in the same way that it did to, for example, a secret profit made by an agent on a transaction on behalf of its principal; ultimately, the universal application of the rule was more attractive, he said.

"The position adopted by [FHR], namely that the rule applies to all unauthorised benefits which an agent receives, is consistent with the fundamental principles of the law of agency," Lord Neuberger said. "The agent owes a duty of undivided loyalty to the principal, unless the latter has given his informed consent to some less demanding standard of duty. The principal is thus entitled to the entire benefit of the agent's acts in the course of his agency."

"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 seems 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," he said.

Lord Neuberger said that there were also "wider policy considerations" supporting his interpretation of the rule, as "concern about bribery and corruption generally has never been greater than it is now". "Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission," he said.

Litigation expert William Christopher said that although the decision was good news for those seeking to claim damages for or recover bribes paid by their agents without their knowledge, the decision did not necessarily mean that a bribe would be considered the proceeds of crime if there was a criminal investigation.

"This would likely depend on whether the owner of the bribe, the principal, was convicted," he said. "In the case of a company prosecuted under the Bribery Act for failure to prevent bribery, this would depend on whether they could avail themselves of the 'adequate procedures' defence."

"There is also a difference between the definition of a bribe in civil law and the criminal definition, which mainly turns on whether you need to prove intention: this is necessary in a criminal case but not in a civil one. All that has to be proved for a civil bribe is that a secret commission was paid to a fiduciary, such as an agent, in the knowledge that he was a fiduciary," he said.