Supreme Court Holds That Bribes Received By An Agent Are Held On Trust For The Principal

The recent judgment handed down by the Supreme Court in FHR European Ventures LLP and others v. Cedar Capital Partners LLC [2014] UKSC 45 has clarified that a bribe or a secret commission received by an agent is held by the agent on trust for his principal, creating a proprietary remedy against the bribe or secret commission itself. The Supreme Court overruled prior Court of Appeal authority that there was no proprietary remedy and a principal only had a claim for equitable compensation against an agent in a sum equal to the value of the bribe or secret commission.

The ruling has important practical implications. If the agent becomes insolvent, a proprietary claim will give the principal priority over the agent's unsecured creditors. In addition, it is possible to trace and follow a proprietary claim in equity. Under English law, there is at present no equitable right to trace or follow a right to equitable compensation.

Background

On 22 December 2004, FHR European Ventures LLP and others purchased the issued share capital of Monte Carlo Grand Hotel SAM ("MCGH") from Monte Carlo Grand Hotel Ltd ("MCGHL") for €211.5 million. Cedar Capital Partners LLC ("Cedar") acted as the claimants' agent in negotiating the purchase. Unbeknownst to the claimants, Cedar had entered into an agreement with MCGHL dated 24 September 2004 which provided for the payment to Cedar of a €10 million fee following a successful conclusion of the sale and purchase. Cedar received €10 million from MCGHL on 7 January 2005.

In November 2009, the claimants commenced proceedings in the High Court seeking recovery of the sum of €10 million. The trial took place before Mr Justice Simon. Mr Justice Simon held that (a) Cedar had failed to make proper disclosure to the claimants of the brokerage agreement; (b) Cedar was liable for breach of fiduciary duty; (c) Cedar should pay €10 million to the claimants. However, Mr Justice Simon refused to grant the claimants a proprietary remedy in respect of the monies as he considered he was bound by a Court of Appeal authority to the opposite effect, Sinclair Investments Ltd v. Versailles Trade Finance Ltd [2012] Ch 453 ("Sinclair").

The claimants' appeal to the Court of Appeal in relation to the refusal to grant a proprietary remedy in respect of the monies was allowed. The Court of Appeal considered that it should distinguish Sinclair and it did so, making an order which included a declaration that Cedar received the10 million fee on...