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UK courts rule on secret commissions and recovering profits

Recovering profits from accessories of bribe beneficiaries and secret commissions were respectively considered in two recent UK appellate decisions, one released earlier this month and another on Wednesday.

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The first case, which came before the Court of Appeal, opens with a somewhat bemusing reference to the first instance of bribery in classical times:

When Odysseus penetrated the underworld, he encountered, among many other ghosts, that of Eriphyle whom Homer (Od. 11.326) calls “hateful” because she had been bribed by Polyneices with Aphrodite’s golden necklace to reveal the whereabouts of her husband, so that he could be found and compelled to march on Thebes where he foresaw he would be killed. This may or may not be the first recorded instance of a successful bribe but, centuries later, bribery is still prevalent and pervasive however much legislators and judges try to stamp it out.

The case concerns the liability of an accessory to account for profits made from transactions involving both the bribe beneficiary and bribe victim.

The accessory, who had received bribery monies from the principal’s agent and bribe beneficiary, also entered into unconnected but profitable chartering transactions with the same parties. Significantly, the accessory was not a fiduciary of the principal bribe victim. Notwithstanding that fact, an account of profits was sought by reason of all his dealings with the bribe beneficiary being tainted.

The appellate court held that while an account of profits would always be ordered against a dishonest or self-dealing fiduciary, there was a discretion whether to order it against a non-fiduciary accessory. In exercising that discretion, particular regard would be paid to causative factors; otherwise, there would be a risk of unjustly enriching the principal bribe victim. As the principal bribe victims (the claimants) would have entered into the profitable transactions, irrespective of the tainted transactions, no account for profits was ordered.

Whether an accessory to a bribe beneficiary should have been given the benefit of a causation defense in such circumstances is highly questionable. Although obtaining a windfall may to a certain extent have unjustly enriched the claimants, it ignores the considerable difficulties encountered by and the risks for the claimants in obtaining redress for the original tainted transactions.  

Novoship (UK) Ltd & Ors v Nikitin & Ors (July 4, 2014) can be found here.

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The second case came before the Supreme Court. It concerns the status of secret commissions and bribes. It arose from the sale of a hotel in Monaco for $211.5 million. The seller, who would have been prepared to take $201.5 million, had instead agreed to pay a $10 million commission to a broker who failed to disclose it to his investor clients and the ultimate purchasers.

The issue was whether the principals had, in addition to a personal claim, an elective proprietary claim to recover the undisclosed commission. A proprietary remedy provides a claimant with priority over unsecured creditors in the event of insolvency and an improved ability to trace and recover the ill-gotten gains.
The agent sought to construct a rather artificial, if not unmeritorious argument, that a proprietary remedy only existed where the principal’s property was actually taken. As the commission was paid after completion, it could not be properly described as property belonging to the principals. Unsurprisingly, the Supreme Court was not prepared to favour the agent with such a fine distinction and held that wider policy considerations required bribes and secret commissions to be held as the principal’s property. Lord Neuberger stated at para 42:
“Secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world. That has always been true, but concern about bribery and corruption generally has never been greater than it is now – see for instance, internationally, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 1999 and the United Nations Convention against Corruption 2003, and, nationally, the Bribery Acts 2010 and 2012. Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.”

FHR European Ventures LLP v Cedar Capital Partners LLC (July 16, 2014) can be found here.

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Both decisions may be a little arid but each provides a useful review of the private law remedies that can be exercised against recipients of bribes and secret commissions and as against accessories of bribers.

The Supreme Court decision also provides a useful reference point to academic articles and the approach taken by other common law jurisdictions to bribes and secret commissions.

Alistair Craig is a commercial barrister practicing in London.

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