Alongside a large number of claims relating to Payment Protection Insurance (PPI), the Courts are also seeing a rise in claims involving secret commissions.
25 Canada Square Chambers specialise in representing the leading financial institutions in these type of claims.
The law of agency in the UK plays an essential role in commercial transactions. It governs the relationship between a principal and an agent, where the principal authorises the agent to act on their behalf in legal and commercial matters.
The agent has a duty to act in the best interests of the principal and within the scope of their authority, known as fiduciary duties. However, in some cases, an agent may be tempted to act against the principal's interests to receive secret commissions or kickbacks.
The English law of agency, duty, scope and breach of fiduciary duty as it relates to secret commissions is complex and has evolved over time through case law.
Duty of an Agent
In McWilliam v Norton Finance (UK) Ltd (in liquidation), [2015] EWCA Civ 186, a definition quoted from Bristol and West Building Society v Mothew [1998] Ch 1 which is oft cited as the definition of fiduciary and the types of fiduciary duties is given as:
“The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary ... A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal”.
[emphasis added]
The agent must also act with single-minded loyalty and good faith towards the principal. An agent must not use their position to benefit themselves or act against the principal's interests.
Breach of Fiduciary Duty
One example of a breach of fiduciary duty is the receipt of a secret commission or kickback from a third party without disclosing it to the principal. As stated by Lord Justice Tuckey in Wilson v Hurstanger Ltd [2007] EWCA Civ 299:
"An agent who receives commission without the informed consent of his principal will be in breach of fiduciary duty. A third party paying commission knowing of the agency will be an accessory to such a breach. The remedies for breach of fiduciary duty are equitable: they of course include rescission and compensation.”
Full Secrets
Wood v Commercial First Business Ltd [2021] EWCA Civ 471 is the leading case on full secret commission where knowledge of the commission and the amounts are not disclosed to the principal. The case states that full secret commissions may be viewed as a bribe by the courts as it may induce the payee to depart from the duty he owes to another person. The full remedies for which are outlined below.
Half-Secrets
In the case of Hurstanger, the fact that commissions may be paid was disclosed to the principal but not the amounts. This is known as half-secret commissions. This may also amount to a breach, but rescission of the contract is not possible as a remedy (the other remedies listed below are still possible to obtain) since there was sufficient disclosure to negate the secrecy element so in law it is not a bribe.
Remedies for Breach of Fiduciary Duty
If an agent is found to have breached their fiduciary duty, the principal may seek various remedies. These include:
- Rescission of the contract - If the agent has acted outside their authority or breached their fiduciary duty, the principal may be able to rescind the contract and seek damages.
- Damages - The principal may also seek damages for any loss suffered due to the breach of fiduciary duty.
- Account of profits - If the agent has received a benefit from a third party, the principal may be entitled to an account of profits (essentially a surrender of any profits made).
Conclusion
In conclusion, the English law of agency, duty, scope, and breach of fiduciary duty as it relates to secret commissions is complex and has evolved through case law. An agent must act in the best interests of the principal, within the scope of their authority, and disclose any benefit received from a third party. Failure to do so will result in a breach of fiduciary duty. As the law evolves, it is essential for agents and principals to understand their rights, responsibilities and seek legal advice where necessary.