FHR was a joint venture vehicle for the purchase of the issued share capital of Monte Carlo Grand Hotel SAM, for which the joint venture paid €211.5 million. Cedar acted as FHR’s agents in negotiating the purchase and owed fiduciary duties to FHR. Unknown to FHR, Cedar also entered into an exclusive brokerage agreement with the vendors by which it became entitled to a fee of €10 million following the successful conclusion of the sale and purchase. The sale went ahead and the vendors paid Cedar that fee. FHR on learning of the payment sought to recover it from Cedar.
11 Bank of Scotland v Liquidators of Hutchison, Main & Co Ltd 1914 SC (HL) 1; Gibson v Hunter Home Designs Ltd 1976 SC 23.
12 (1835) 1 Sh & Macl 203.
13 Mansfield (n 6) at 338-39.
14 [2014] UKSC 45. I had the pleasure of sitting on the panel for the case and also prepared a briefing note for my colleagues on what might be the approach of Scots law in such circumstances.
The practical issue in FHR was whether a principal of an agent who had breached his fiduciary duty by taking an undisclosed commission could assert a proprietary remedy against a third party to which, it was asserted, the agent had transferred the money. The legal question was whether a bribe or secret commission received by an agent was held by the agent on trust for his principal; or did the principal merely have a claim against the agent for equitable compensation in a sum equal to the bribe or commission?
Lord Neuberger delivered the unanimous judgement of the court, holding that Cedar held the secret commission on trust for FHR. He set out three principles from the judgment of Millett LJ in Bristol and West Building Society v Mothew,15 namely:
(i) an agent owes a fiduciary duty to his principal because he has undertaken to act for or on behalf of the principal in circumstances which give rise to a relationship of trust and confidence;
(ii) an agent must not place himself in a position in which his duty and his interest may conflict, and as part of this rule, the agent must not make a profit out of his trust; and
(iii) a fiduciary who acts for two principals with potentially conflicting interests breaches his obligation of undivided loyalty unless he has obtained the informed consent of both following full disclosure.
A Scots jurist can readily assent to those principles.16 So also can he or she agree with the well-established principle that where an agent receives a benefit in breach of his fiduciary duty, the agent is obliged to account to the principal for such a benefit: Regal (Hastings) Ltd v Gulliver17 has frequently been relied on in commercial cases in Scotland. In English law the agent must pay a sum equal to the profit by way of equitable compensation; Scots law does not speak of equitable compensation but the obligation to account and pay is clear.
In English law, where an agent acquires a benefit, which came to his notice as a result of his fiduciary position, he is treated in equity as having
15 [1998] Ch 1 at 18.
16 See, in relation to (ii), for example Hamilton v Wright (1839) 1 D 668 (Lord Cockburn at first instance) (1842) 1 Bell’s App Cas 574; Aberdeen Railway Co v Blaikie Brothers (1853) 1 Macq 461; Magistrates of Aberdeen v University of Aberdeen (1877) 4 R (HL) 48. See also Laura Macgregor’s discussion of fiduciary duty in chapter 6 of her admirable book, The Law of Agency in Scotland (2013), including her discussion of the constructive trust at para 6.38ff.
17 [1967] 2 AC 134 (Note).
acquired the benefit on behalf of the principal. Thus the thing acquired is beneficially owned by the principal because the general rule is that equity treats as done that which ought to have been done. This rule is strictly applied in favour of the principal so that the agent must disgorge a benefit even if the principal could not otherwise have acquired it.18
But what is the legal basis of the principal’s claim when a bribe or secret commission, unlike an emerging business opportunity which an agent wrongfully diverts from his principal, is something which the principal would not have received if the agent had complied with his fiduciary duty? In the past English case law has not spoken with one voice on whether a principal enjoys a proprietary remedy in relation to bribes and secret commissions, as Lord Neuberger’s judgment in FHR shows.19 More recently the Privy Council in Attorney General for Hong Kong v Reid20 held that bribes which had been paid to a corrupt police officer were held on trust for his principal and could therefore be traced into properties which the policeman had acquired in New Zealand. There has also been a very learned academic debate with powerful jurists on each side. On the one hand Professor Sir Roy Goode21 and Professor Sarah Worthington22 among others have argued that the principal has no proprietary interest in such a bribe or commission while Lord Millett23 and Professor Lionel Smith24 among others have argued that an agent who obtains any benefit in breach of his fiduciary duty holds that benefit on trust for his principal.25 Many other articles have been published in what Sir Terence Etherton described as “this relentless and seemingly endless debate.”26
18 Keech v Sandford (1726) Sel Cas Ch 61; Cook v Deeks [1916] 1 AC 554; Phipps v Boardman [1967] 2 AC 46; Bhullar v Bhullar [2003] 2 BCLC 241.
19 FHR (n 14) at paras 15-28.
20 [1994] 1 AC 324.
21 R Goode, “Proprietary Restitutionary Claims” in W R Cornish and G Virgo (eds) Restitution: Past, Present and Future (1998), ch 5; R Goode, “Property and Unjust Enrichment” in A Burrows (ed), Essays on the Law of Restitution (1991) ch 9; R Goode,
“Proprietary Liability for Secret Profits – A Reply” (2011) 127 LQR 493-95.
22 S Worthington, “Fiduciary Duties and Proprietary Remedies: Addressing the Failure of Equitable Formulae” [2013] CLJ 720-52.
23 P Millett, “Bribes and Secret Commissions” [1993] RLR 7-30; P Millett, “Bribes and Secret Commissions Again” [2012] CLJ 583-614.
24 L Smith, “Constructive Trusts and the No-profit Rule” (2013) 72 CLJ 260-63.
25 Further valuable contributions to the debate include G Virgo, “Profits Obtained in Breach of Fiduciary Duty: Personal or Proprietary Claim?” (2011) 70 CLJ 502-04 and D Hayton, “Proprietary Liability for Secret Profits” (2011) 127 LQR 487-93.
26 T Etherton, “The Legitimacy of Proprietary Relief” (2014) 2(1) Birkbeck Law Review 59-86, 62.
FHR gives an answer to this debate for the purposes of English law.
A principal enjoys a proprietary remedy against his agent in relation to benefits such as bribes which were not derived from the principal’s assets or from assets which should have been the property of the principal. In the case of FHR one might readily assume that the vendor would have accepted a lower price for the shares in the hotel company if it had not had to pay the commission; but the rule did not turn on evidence that the purchaser had suffered any loss. The rule is simple: “any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for his principal.”27 Thus the principal can require the agent to account for any such benefit or he can claim the beneficial ownership of the funds or assets which the agent has obtained. The principal may also trace or follow in equity the proceeds of the bribe or commission in the hands of knowing recipients, a remedy which would not be available unless he had a proprietary claim. Lord Neuberger observed that this view was consistent with other common law jurisdictions, notably Australia, New Zealand, Singapore and the United States of America.