News & what's on - Written by on Tuesday, August 26, 2014 5:54 - 1 Comment

Lawyer offers bribe payers cash back guarantee (some strings attached!)

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Today’s post from a civil litigator colleague, Alan Sheeley.

Alan clears up one of the legal questions that has baffled the best legal minds in the land for years, following a recent judgment.  In a nutshell, it just got a whole lot easier to get your money back if you are the *victim* of a bribery scam.

By Alan Sheeley, Partner, Pinsent Masons LLP

This summer Lord Neuberger cut through 200 years of inconsistent judicial decisions and academic rhetoric. He concluded, through his Supreme Court Judgment: FHR European Ventures LLP and Others v Cedar Capital Partners LLC [2014] UKSC 45, that secret commissions/bribes are held by an Agent on trust for the Principal.

The judgment is of significant importance to Civil Fraud Litigators as their armoury has now been significantly strengthened.

Principals will now be able to make proprietary claims against corrupt Agents and can trace the secret commissions/bribes into third parties’ hands. Further, Principals will be able to claim any additional profits that may have been obtained while the secret commission/bribe has been held in the dishonest Agents’/third parties’ hands!

Therefore, for example, if shares are bought with the secret commission/bribe and the shares increase in value then the Principal can elect to seek judgment for the value of the shares and the subsequent increase in value i.e. the profit. In the alternative, if the shares have decreased in value, the Principal can seek to recover the original value of the secret commission/bribe.

It has never been in doubt that an Agent who undertakes to act for a Principal in matters that give rise to a relationship of trust and confidence owes fiduciary duties to the Principal. As such, the law has always been clear that an Agent must not make a secret profit out of his position of trust and must not place himself in a position where his duty and his personal interest may conflict.

Further, it has always been accepted that where a fiduciary acts for two Principals with a conflicting interest, and without informed consent, he will be in breach of his obligations of undivided loyalty to both Principals. These rules have been established for many years and include all fiduciary relationships i.e. company/director, employer/employee and trustee/beneficiary.

The troubling and perplexing question that has baffled great legal minds for centuries has been the answer to what is the status of money held by an Agent if he has breached his fiduciary duty and accepted a secret commission/bribe?

One argument was that the secret commission/bribe belonged to the Agent and the Principal only had a personal right against the Agent to claim the value of the secret commission/bribe.

The alternative argument was that the secret commission/bribe always belonged to the Principal and that the Agent held the secret commission/bribe on trust for the Principal. The latter argument for numerous reasons including simplicity, practicality and public policy is now the law following Lord Neuberger’s judgment for all fiduciary relationships.

Lord Neuberger, in support of the judgment, quoted Lord Templeman’s decision from Attorney General for Hong Kong v Reid [1994] 1 A.C. 324, “[b]ribery is an evil practice which threatens the foundations of any civilised society“. He went on and said “secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world….[and] 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“.

Lord Neuberger’s judgment is also of significant importance if the dishonest Agent becomes insolvent. As the secret commission/bribe is held on trust for the Principal, a proprietary claim can be made in respect of the monies paid. In the event of the Agent’s insolvency, this gives the Principal a priority over the Agent’s unsecured creditors.

Many commentators have suggested that this disadvantages unsecured creditors and affords the Principal with an unfair advantage. However, as Lord Neuberger comments, many judges have ruled that the value of any transaction is increased pro-rata by the value of the secret commission/bribe. If this is accepted, as clearly it now has been, then the secret commission/bribe is, and always has been, the Principal’s money. Therefore, it should not (and now does not) form part of a dishonest Agent’s estate.

It is likely that Civil Fraud Litigators will now use this latest judgment to expand the effects of freezing injunctions to cover traceable proceeds. This strategy, along with claims in dishonest assistance and knowing receipt will provide Principals with the maximum chances of recovering secret commissions/bribes paid to their Agents without their knowledge or consent.

The civil legal armoury provided to Principals who have been victims to the actions of unscrupulous Agents has been bolstered by this sensible and pragmatic judgment. I am sure we will now see a rise in claims being brought by unwary Principals to recover what rightly belongs to them from their dishonest Agents!

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Martyn Osment
Aug 27, 2014 3:06

Great article Alan, we can only wish there were more judgements that offered such clarification.

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