Supreme Court upholds ruling on remedy for ‘secret commission’

The Supreme Court has upheld a ruling that investors who bought the Monte Carlo Grand Hotel in Monaco for €211.5m are entitled to a constructive trust of the €10m “secret commission” that the seller paid their agent. Last year, the Court of Appeal allowed an appeal by the investment group against a high court ruling that they were entitled only to the personal remedy of an account in equity rather than the proprietary remedy of a constructive trust. Now the Supreme Court has upheld that ruling. Lord Neuberger, giving the Court’s ruling, said that the case raised the question whether a bribe or secret commission received by an agent is held by the agent on trust for his principal, or whether the principal merely has a claim for equitable compensation in a sum equal to the value of the bribe or commission. He said: “The answer to this rather technical sounding question, which has produced inconsistent judicial decisions over the past 200 years, as well as a great deal of more recent academic controversy, is important in practical terms. If the bribe or commission is held on trust, the principal has a proprietary claim to it, whereas if the principal merely has a claim for equitable compensation, the claim is not proprietary. The distinction is significant for two main reasons. First, if the agent becomes insolvent, a proprietary claim would effectively give the principal priority over the agent’s unsecured creditors, whereas the principal would rank pari passu, ie equally, with other unsecured creditors if he only has a claim for compensation. “Secondly, if the principal has a proprietary claim to the bribe or commission, he can trace and follow it in equity, whereas (unless we develop the law of equitable tracing beyond its current boundaries) a principal with a right only to equitable compensation would have no such equitable right to trace or follow.” Describing the usual rule, he 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. This principle is wholly unaffected by the fact that the agent may have exceeded his authority. The agent’s duty is accordingly to deliver up to his principal the benefit which he has obtained, and not simply to pay compensation for having obtained it in excess of his authority.” Whilst he said there was “some force” in the notion advanced by the appellants that this rule should not apply to a bribe or secret commission paid to an agent, he found that the respondents’ formulation of the rule “has the merit of simplicity”, to the effect that any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for the principal. He said that, in the present case there was “no plainly right answer”, continuing: “Accordingly, in the absence of any other good reason, it would seem right to opt for the simple answer.” In the Court of Appeal ruling, Lewison LJ said that the investment group pursued an appeal on the precise remedy because it will have to pursue accounts and inquiries to discover what happened to the €10m fee paid to Ramsey Mankarious’ Cedar Capital Partners, and who has benefited from it. He said that those proceedings were likely to be more effective in ensuring payment in full if a proprietary interest was established. He said that the investor group, which included FHR European Ventures LLP, Kingdom Hotels International, Fairmont Hotels and Resorts Inc, Uberior Ventures Ltd and Bank of Scotland plc, bought the share capital in the hotel from Monte Carlo Grand Hotel Ltd for €211.5m in December 2004, a price negotiated on its behalf by Cedar. However, Simon J found in 2011 that Cedar had not sufficiently disclosed its relationship with the seller, with which it had entered into an exclusive brokerage agreement that secured it the €10m commission. Initially, he found that it held the full sum on constructive trust for the group, but by the time he made the final order, he changed his mind and decided that the group was only entitled to the personal remedy of an account in equity. In this case, Lewison LJ said that the group had been deprived of the opportunity to obtain the hotel for €10m less than they paid. As a result, he said that Cedar held the benefit of its contract with the sellers on a constructive trust for the group. FHR European Ventures LLP and ors v Mankarious and ors Court of Appeal (Lord Neuberger, Lord Mance, Lord Sumption, Lord Carnwath, Lord Toulson, Lord Hodge, Lord Collins) 16 July 2014Christopher Pymont QC (instructed by Hogan Lovells International LLP) for the respondentsMatthew Collings QC and Duncan McCombe (instructed by Farrer & Co) for the appellant