Summary

Where an agent received a bribe or secret commission in breach of his fiduciary duty to his principal, he held that bribe or secret commission on trust for his principal, meaning that the principal had a proprietary claim to it.

Facts

The appellant agent (C) appealed against a decision ([2013] EWCA Civ 17, [2014] Ch.1) concerning the appropriate remedy available to the respondent investors (F) in respect of a secret profit which it had received.

While advising F in relation to their purchase of a hotel, C had entered into an agreement with the sellers of the hotel under which C was to receive a fixed commission of €10 million for securing a purchaser. C failed to notify F of that agreement and received the commission when F bought the hotel. F sought to recover the €10 million from C. The Court of Appeal held that C had received the commission on constructive trust for F. The issue concerned the scope of the equitable rule that where an agent acquired a benefit which came to his notice as a result of his fiduciary position, or pursuant to an opportunity which resulted from his fiduciary position, he was to be treated as having acquired the benefit on behalf of his principal. The question was whether that rule applied to a bribe or a secret commission obtained by an agent in breach of his fiduciary duty.

F submitted that where an agent received a bribe or secret commission in breach of his fiduciary duty to his principal, the agent held the sum on trust for the principal, giving the principal a proprietary claim to it. C argued that a bribe or secret commission was not a benefit which could properly be said to be the property of the principal, meaning that the principal merely had a claim for equitable compensation.

Held

It was well established that where an agent received a benefit in breach of his fiduciary duty, the agent was obliged to account to the principal and to pay a sum equal to the benefit by way of equitable compensation. That represented a personal remedy for the principal against the agent. However, in cases where the rule applied, the agent was to be treated as having acquired the benefit on behalf of his principal. In such cases, the principal had a proprietary remedy in addition to his personal remedy against the agent and could elect between the two remedies. A number of authorities suggested that the rule should apply to bribes or secret commissions paid to an agent, so that the agent held them on trust for his principal. However, the decisions in Tyrrell v Bank of London 11 E.R. 934, Metropolitan Bank v Heiron (1880) 5 Ex. D. 319 and Lister & Co v Stubbs (1890) 45 Ch. D. 1 were inconsistent with those authorities (see paras 6-7, 9, 21, 23-26, 32 of judgment). F's formulation of the rule had the merit of simplicity, whereas C's was more likely to result in uncertainty. A further advantage of F's position was that it could be seen as somewhat inconsistent for equity to consider that in all cases where an agent acquired a benefit in breach of his fiduciary duty, he had to account for that benefit to his principal, whilst only allowing the principal to claim the benefit as his own property in some cases. 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 seemed unattractive. The reason why the agent should not have accepted the bribe or commission was because it put him in conflict with his duty to his principal. There also had to be a strong possibility that the bribe had disadvantaged the principal. Further, if the rule did not apply to bribes or secret commissions, a principal whose agent wrongly received a bribe or secret commission would be worse off than a principal whose agent obtained a benefit in far less opprobrious circumstances. Wider policy considerations also supported F's case. An argument in favour of restricting the ambit of the rule was that a wide application of the rule would tend to prejudice the agent's unsecured creditors as it would serve to reduce the agent's estate if he became insolvent. However, that argument had limited force because the proceeds of a bribe or secret commission should not be in the agent's estate at all and because the bribe or commission would often have reduced the principal's benefit from the relevant transaction and therefore could fairly be seen as his property. It was also just that a principal whose agent had obtained a bribe or secret commission should be able to trace the proceeds of the bribe or commission into other assets and to follow them into the hands of knowing recipients. Those considerations supported the proposition that a bribe or secret commission accepted by an agent was held on trust for his principal. The decision in Tyrell should not stand in the way of the conclusion that the law had taken a wrong turn in Heiron and Lister. Those decisions and any subsequent decisions which relied on or followed them should be treated as overruled, Heiron and Lister overruled, Tyrell not followed (paras 35-37, 41-44, 46-50).

Appeal dismissed