In a recent post, we shone a spotlight on bribery in the UK. But where an agent receives a bribe or secret commission in breach of the duties they owe their principal, who does it belong to?

Fiduciary duties

‘Fiduciary’ is one of those fancy words that lawyers use to refer to the duties owed by one person (the agent) to another (the principal) where the agent is able to exercise rights and powers of the principal. For example, a director owes fiduciary duties to a company since the director is able to take action in the name of the company and has control over the company’s assets. The relationship between an agent and principal is based on trust, given the influence the agent can exert over the principal’s rights and assets.

The law imposes a number of duties on agents in an attempt to underpin their primary obligation of loyalty. In particular, agents must not put themselves in a position in which their own interests conflict with those of their principal and they must not make a profit from their position as a fiduciary.

Secret profit

What happens when an agent makes a secret profit from their position without telling the principal? Historically, the law only allowed a principal to pursue money or other assets held by the agent where either the assets were the beneficial property of the principal or the agent had obtained the asset by taking unfair advantage of an opportunity or right of the principal.

If the principal could never have received the secret profit or bribe because it wasn’t intended for them, the principal couldn’t argue that the money belonged to it and therefore would have no proprietary claim against the agent.

Therefore, results could turn on the finer circumstances in which payments were made, leading to evidential difficulties for the parties involved and uncertainty in the potential outcome.

Welcome clarification

A recent case has clarified the law, confirming that an agent who receives a bribe or secret commission in breach of their fiduciary duties will always hold that sum on trust for their principal. The Supreme Court said that a principal will have a proprietary claim to the benefit received by the agent, which may make recovery easier for the principal for two reasons:

  • firstly, the principal will rank ahead of other unsecured creditors on the insolvency of the agent; and
  • secondly, the principal will be able to trace or follow the money into the hands of third parties (for example, if the agent spends their bribe on a new sports car)

Objectionable conduct

The decision highlights the stringent view that the UK courts are prepared to take in relation to unsavoury business practices. The Supreme Court confirmed that bribes are ‘objectionable’ and undermine trust in the commercial world so a simple and certain rule when dealing with them was to be preferred.

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.