Backhanders are not new. For more than 120 years it has been a well established principle of law that the acceptance by an agent of a secret commission amounted to a breach of the agent’s duties to the principal, regardless of whether the agent acted innocently or not.
The basis for this principle is that an agent owes his principal a duty of fidelity, a duty not to place himself in a position of conflict and other duties with respect to the principal’s interests which must take precedence over the agent’s interests. These duties are held to a high standard, and are taken very seriously by the courts.
Indeed more than 120 years ago one Appeal Court judge observed that there were many agents conducting secret side deals for themselves at the expense of their principals. That was in 1888. Backhanders are as alive and kicking now as they were then.
It is not just agents falling for the temptation of secret profits. There are many similar cases involving directors of companies. As with agents, such conduct puts directors in breach of their fiduciary duties to the company. But there is a wealth of case law where it involves an agency. Why? Probably because of the commission based nature of the work, the fact that the crux of the agent’s role is to secure commercial deals for its principal and it is afforded a level of flexibility and freedom as to how they do this – in other words, the ins and outs of the negotiation of the deal are not necessarily policed by the principal. The temptation to strike a side deal is likely to be more prevalent.
Industries such as sport, which have both money and agents in abundance, are ripe grounds for secret commissions. Football, for example, has had its fair share of bribery and secret profits scandals.
In one case decided in 2009 an agent accepted secret commission as part of securing a contract for his player client at Dundee football club. To read more on this case please click here.
Another case currently before the courts concerns Wilfried Bony, a footballer for Manchester City currently on loan to Stoke City. Mr Bony is suing two of his agents (and two limited companies connected to each of them) in respect of secret commissions in excess of £8 million allegedly received during negotiations of Mr Bony’s contract with his first British club, Swansea.
In the 2009 case the sum was small - £3,000 in secret commission. It concerned the obtaining of a work permit for a Mr Jack to play as a goalkeeper for Dundee. Mr Jack might not have taken the matter to Court had the agent not sued him for non-payment of commission under the agreement between them – Mr Jack stopped paying the monthly commission payment (10% of his monthly salary at Dundee) as soon as he discovered that the agent had received a secret commission as part of the deal struck with Dundee!
The Court of appeal in this case had no difficulty finding that the acceptance of a secret commission was a breach of the agent’s duty of fidelity owed to Mr Jack.
The agent sought to argue (as many agents in this situation do), that the commission received was in respect of a private separate arrangement, which the agent was entitled to enter and make a profit for himself provided that it was “collateral” to his fiduciary duty to his principal. The argument was unsurprisingly rejected (and has been rejected in other cases) because, where the agent is using his position or connection with the principal to obtain a benefit for himself there is a breach of duty. It is not about whether there is likely to be an impact on the money payable to the principal, but whether the actions amount to a breach of the agent’s duty.
Equally, Mr Jack was not only entitled to stop paying commission to the agent as a result of the breach of duty, he was entitled to repayment of the fees already paid! Mr Jack was also, unsurprisingly, entitled to damages equal to the £3,000, and there was to be no deduction to reflect the value of the work done in obtaining the work permit – the fact that the permit was for Mr Jack was irrelevant: the side deal was agreed without Mr Jack’s agreement the commission was not disclosed to him.
The judgment was an opportunity for the Court of Appeal to hammer home the high standard of duty which agents must uphold, and the importance of open and honest commercial dealings.
In 2013, the Supreme Court grappled with the remedies available to a principal in recovering a bribe or secret commission received by its agent. The case involved an agency fee paid to the agent by a vendor for its assistance in the sale and purchase of a company, which the agent did not disclose to its principal, the Claimant purchaser. The legal question was, is a secret commission received by an agent held on trust for his principal, in which case the principal has a proprietary claim to it, meaning it:
(1) can trace the commission payment to wherever it has gone and recover it; and
(2) has priority over the agent’s unsecured creditors.
In contrast if the secret commission is not held on trust, the principal has a claim just for compensation of the sum, which cannot be traced – so if the agent has moved the funds, or used it to purchase goods or property then the principal cannot recover the sum. It also means the principal is merely an unsecured creditor, ranking along with the rest of the agent’s creditors.
The Supreme Court analysed the case law relating to agencies and secret commissions at length. Arguments in favour of the agent sought to draw a distinction between:
(i) a bribe or secret commission paid to the agent; and
(ii) a secret profit made on a transaction on which the agent is acting for his principal (the profit properly owing to the principal) or a profit made on an otherwise proper transaction which is entered into as a result of some knowledge or opportunity he has gained through the agency.
The agent argued that only scenario (ii) should entitle the principal to a proprietary claim. Scenario (i) was said to be a payment/benefit that derived from opportunities outside the scope of the agent’s endeavours. The distinction being that (ii) comes from a third party and not a benefit that should have been obtained for the principal.
However, the Supreme Court sensibly found that, by treating a bribe or secret commission as separate because it could not have been received by the principal (and so denying the principal a proprietary claim in tracing the payment) was unattractive – it effectively enabled the agent to benefit from its own breach of duty! Although the secret commission was not a payment that was originally supposed to be for the principal is beside the point: the very reason the agent was able to receive the secret commission was in the course of his agency and the acceptance of such a payment puts him a position of conflict with his principal – he is accepting the payment because it is in his own interest to do so, not in the interest of his principal. Often, a secret commission is a sweetener to secure a deal where the deal may or may not be in the principal’s best interest.
Again, the overarching principle was the agent’s duty to his principal. Therefore, any distinction between how the secret payment was made was an artificial one - either way it amounted to a breach of the agent’s duty. It was therefore right for the Supreme Court to find that principles of equity should apply – the secret commission is held on trust for the principal, which entitled the principal to a proprietary claim against the agent.
Take home points
There is clear judicial authority that a principal can bring a proprietary claim against an agent that receives a secret commission in the course of its agency.
In turn this means the principal can trace the sum to wherever the agent has put it, including into assets.
It also gives the principal greater powers of relief, such as freezing injunctions, to prevent the agent disposing of assets into which the funds may have been transferred.
It will be interesting to see how Mr Bony’s case develops. £8 million is not an insignificant sum and, given that it involves Premier League teams, it is likely to hit headlines. If Mr Bony is held to be right that his agents have received secret commissions, then the court will in all likelihood find that there has been a serious breach of an agent’s duty and it is likely to result in a proprietary claim into the agents’ assets for the sums involved.