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Devonshire, Peter --- "Bribery in retrospect: where did it all go wrong?" [2016] OtaLawRw 6; (2016) 14 Otago LR 297

Last Updated: 13 January 2018

Bribery in Retrospect: Where did it all go wrong?

Peter Devonshire*

I Introduction

The concept of wrongful gain or benefit is perceived differently across the remedial spectrum of private law. This is generally determined by the characterisation of the wrong and the normative regime that governs it. Equity tends to focus on the fiduciary’s undertaking in defining the nature and degree of accountability. It is settled law that a fiduciary is precluded by virtue of his or her office from making unauthorised personal gains. This is part of the wider principle that those who assume the role of a fiduciary must be disinterested in any benefits or opportunities that are inconsistent with their duties to the principal.

It might be thought that this principle would comfortably accommodate

the “evil practice” of bribery of an agent to subvert his fiduciary duties.1

Perhaps surprisingly, the status of bribes and secret commissions has

proven particularly vexing. The Australian position is that in addition

to personal liability, the errant fiduciary may be required to hold illicit

gains on constructive trust for the betrayed principal. In the main,

such wrongs are viewed generically for the purpose of imposing

proprietary relief. This reflects a broad orientation towards equitable

wrongs focusing on the overlapping themes of (i) conflict of personal

interest and fiduciary duty, and (ii) misuse of fiduciary position.

The latter is described expansively by reference to an obligation to

account for any benefit or gain obtained by reason of a fiduciary position

or an opportunity or knowledge resulting from it.2 The objective is to

preclude the fiduciary from abusing his office for personal gain.3 Thus

bribes fall within the presumptive rule that a constructive trust is an

* Professor, Faculty of Law, University of Auckland. A version of this article was presented at the “Law of Obligations: Issues in Restitution Symposium” held at the Faculty of Law, University of Otago in August

2016. I am grateful to my colleagues at Otago for their kind hospitality. I would also like to acknowledge the New Zealand Law Foundation’s financial support for this event. My paper has benefited from comments received at the Symposium and also the views of members of the Property and Trusts Section at the Society of Legal Scholars Annual Conference held at Oxford in September 2016. I am grateful to Jack Alexander for his excellent research assistance. Finally, my thanks are due to Peter Watts and Rohan Havelock for their most helpful comments on an earlier draft of this article.

1 Attorney–General for Hong Kong v Reid [1993] UKPC 2; [1994] 1 AC 324 (PC) at 330.

2 Howard v Commissioner of Taxation [2014] HCA 21, (2014) 253 CLR 83 at


3 Chan v Zacharia [1984] HCA 36; (1984) 154 CLR 178 at 198–199.

appropriate response where “an advantage has accrued in breach of

fiduciary duty or by misuse of the fiduciary position”.4

In contrast, historically the English position has been more restrictive. This is aptly depicted by the comments of the Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd:5

... previous decisions of this court establish that a claimant cannot claim proprietary ownership of an asset purchased by the defaulting fiduciary with funds which, although they could not have been obtained if he had not enjoyed his fiduciary status, were not beneficially owned by the claimant or derived from opportunities beneficially owned by the claimant. However, those cases also establish that, in such a case, a claimant does have a personal claim in equity to the funds.

As this passage indicates, unless the principal could establish a proprietary interest in the fiduciary’s illicit gains, relief was generally limited to an account of profits or equitable compensation.6 This mirrors a traditional insistence that constructive trusts should be confined to the institutional model.7 The debate over bribery has therefore hinged on fine distinctions as to whether a particular bribe can, as a matter of property law, be attributed to the principal.8 Absent this finding, there is no proprietary base to underpin a constructive trust.9

II Elements of the Modern Debate

The genesis of the modern debate lies with the classic case of Lister & Co v Stubbs.10 A purchasing agent, Stubbs, received bribes from one of his employer ’s suppliers to induce him to place purchasing contracts with the briber. When his actions were discovered, Stubbs’ employer sought an interlocutory injunction to restrain him from disposing of certain freehold

4 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, (2012) 200 FCR

296 at [510].

5 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA

Civ 347, [2012] Ch 453 at [89] per Lord Neuberger MR (as he then was).

6 The principal’s personal compensatory claim took the form of an action

for money had and received or recovery of an equitable debt.

7 Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12; [1996] AC 669 (HL) at

714–716; Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd, above

n 5, at [37]; FHR European Ventures LLP v Cedar Capital Partners LLC [2014]

UKSC 45[2014] UKSC 45; , [2015] AC 250 at [47]; Angove’s Pty Ltd v Bailey [2016] UKSC 47,

[2016] UKSC 47; [2016] 1 WLR 3179 at [27].

8 The debate was further confounded by uncertainty as to the nature of

non–pecuniary bribes. Where a bribe consists of property, such as shares

or land, there is authority for the view that the principal may claim the

asset in specie or its value. See Re Morvah Consols Tin Mining Co (1875)

2 Ch D 1 (CA) [McKay’s case]; Re Caerphilly Colliery Co (1877) 5 Ch D 336

(CA) [Pearson’s case]; Eden v Ridsdales Railway Lamp & Lighting Co Ltd

(1889) 23 QBD 368 (CA).

9 Peter Birks An Introduction to the Law of Restitution (2nd ed, Clarendon

Press, Oxford, 1989) at 386.

10 Lister & Co v Stubbs (1890) 45 Ch D 1 (CA).

properties and investments that represented the proceeds of the bribes. To follow the bribe moneys, the employer had to establish a proprietary interest in the funds. At first instance, the application was dismissed. Stubbs’ conduct was plainly a breach of duty, but the bribe money had not originated from the employer and was therefore not clothed with a trust in the hands of the employee.11 The judgment was upheld by the Court of Appeal, which held that the receipt of a bribe by an employee merely gave rise to a debtor–creditor relationship between employer and employee. In this setting, breach of fiduciary duty failed to kindle a trustee–beneficiary relationship. The bribe money was deemed the property of the dishonest employee and although he was accountable for this to his employer, the resultant liability was only a debt. The employer was therefore unable to assert a proprietary claim and could not trace the bribe money into substituted assets.

Despite reservations, Lister v Stubbs held sway in English jurisprudence12 until the Privy Council’s landmark decision in Attorney–General for Hong Kong v Reid.13 In Reid, the defendant held senior positions as a solicitor for the Government of Hong Kong, where he was responsible for the prosecution of major commercial frauds. He was convicted of accepting bribes for obstructing the prosecution of certain offences. Reid was ordered to pay the Crown HK$12,400,000, which sum was presumed to be derived from bribes. Part of the funds were used to acquire freehold properties in New Zealand. The Attorney–General for Hong Kong lodged caveats against these properties on the ground that they represented the proceeds of bribes received in breach of his fiduciary duty to his employer for whom they were held on constructive trust. Proceedings were subsequently brought to prevent the caveats from lapsing.

It was held at first instance,14 and by the New Zealand Court of Appeal,15 that on the authority of Lister v Stubbs, Reid was only personally accountable for the bribes. He was not a constructive trustee of the bribe monies or their substitutes and accordingly the Crown had no interest in the New Zealand properties. On further appeal, the Privy Council rejected Lister v Stubbs’ reasoning and affirmed the primacy of the fiduciary’s undertaking to his employer. The Board effectively recast the proprietary consequences of bribery to conform to those expectations. It was accepted that at law the bribe money belonged to the recipient, Reid. However, acting in personam, equity insists that it is unconscionable

11 The conclusion would be different if money had been given by the employer to the employee for payment of goods ordered on the employer ’s behalf (Lister & Co v Stubbs, above n 10, at 4).

12 Lister v Stubbs was preceded by a decision of the House of Lords in Tyrell v Bank of London [1862] EngR 498; (1862) 10 HL 26, 11 ER 934 (HL) and followed by a number of appellate judgments, including Re North Australian Territory Co [1892]

1 Ch 322 (CA) [Archer’s case]; Powell & Thomas v Evan Jones & Co [1905] 1

KB 11 (CA); Attorney–General’s Reference (No 1 of 1985) [1986] QB 491 (CA).

13 Attorney–General for Hong Kong v Reid, above n 1.

14 Attorney–General for Hong Kong v Reid (1991) 1 NZConvC 191,020 (HC).

15 Attorney–General for Hong Kong v Reid [1992] 2 NZLR 385 (CA).

for a fiduciary to retain any benefit resulting from a breach of duty. As equity regards as done that which ought to be done, as soon as the bribe was received by the fiduciary, the money or its substitute was held on constructive trust for the principal. Reid was effectively treated as lacking status or capacity in equity to hold the bribe.16

In the wake of Reid, the controversy rolled on.17 Two judgments of the Court of Appeal, less than two years apart, espoused quite different views. Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd18 declined to follow Reid, and stated that as a general rule a fiduciary is only personally liable to account for profits obtained in breach of fiduciary duty. Sinclair concerned the fallout from an elaborate Ponzi scheme involving inter–company dealings. C, a director of T Ltd, fraudulently applied T Ltd’s funds to artificially inflate the value of V Ltd, a company in which he held shares. Subsequently C sold the shares in V Ltd for GBP28,680,000.

The claimant, an assignee of the interests of T Ltd, asserted a proprietary interest in the proceeds of the shares sold by C in breach of his fiduciary duties as a director of T Ltd. Although C was personally accountable for the profit, the claimant sought an equitable proprietary interest to gain priority over other creditors.

Delivering the judgment of the Court of Appeal, Lord Neuberger MR (as he then was) distinguished between the exploitation by a fiduciary of property or opportunities subject to fiduciary obligations and the wrongful exploitation of a fiduciary position, resulting in unauthorised gains. A fundamental distinction was drawn between a fiduciary enriching himself by depriving the principal of an asset and a fiduciary enriching himself by doing a wrong to the principal. Claims falling in the first category attracted proprietary relief, claims in the latter category did not.19 On the present facts, C was under no duty to obtain on behalf of the claimant the profit from the sale of his shares. The claimant therefore had no proprietary basis for a constructive trust. In contrast to Reid, the Court of Appeal in Sinclair effectively allowed proprietary reasoning to shield the delinquent fiduciary from the deterrent effect of the constructive trust.20 This was clearly adrift from the philosophical stance adopted by the Privy Council and the prevailing view of other Commonwealth jurisdictions.

16 Attorney–General for Hong Kong v Reid, above n 1, at 331.

17 This was exacerbated by conflicting views as to the precedential value of a

Privy Council decision in relation to domestic courts, including the Court

of Appeal. This issue has recently been addressed by the UK Supreme

Court in Willers v Joyce (No 2) [2016] UKSC 44, [2016] 3 WLR 534.

18 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd, above n 5.

19 At [80]. Compare with the Australian position discussed above.

20 A point forcefully criticised by the Federal Court of Australia (Full Court)

in Grimaldi v Chameleon Mining NL (No 2), above n 4, at [574].

In FHR European Ventures LLP v Mankarious,21 a differently constituted Court of Appeal considered the status of a secret commission received by an agent in respect of a property sale. The agent acted for the purchaser, an investment group, in the acquisition of a hotel. The agent had entered into an undisclosed brokerage agreement with the vendor, which provided for payment of EUR10,000,000 for securing a purchaser. On completion, the vendor deducted the agreed commission from the sale proceeds and remitted it to the agent. On discovering this arrangement, the purchaser claimed the commission. The Court of Appeal held that although the plaintiff did not retain any proprietary interest in its payment to the vendor, the plaintiff had been deprived of the opportunity to purchase the property for up to EUR10,000,000 less than it actually paid. In these circumstances the benefit of the brokerage agreement was held on constructive trust for the plaintiff. The Court took a broad view of the nature of the plaintiff’s deprivation and the corresponding enrichment of the defendant22 and eschewed narrow enquiries into the proprietary phases of the transaction.

The final word was left to the UK Supreme Court. The defendant in FHR v Mankarious appealed the finding that the secret commission was held on constructive trust for the plaintiff. A bench of seven justices dismissed the appeal23 and in a single judgment, 24 Lister v Stubbs was delivered its quietus. The Supreme Court frankly conceded that the law in this area was beset with divergent academic and judicial views and that it was impossible to produce the right answer based on pure legal authority.25 Distinctions that had preoccupied earlier decisions were swept away, in particular the notion that an agent could not hold a bribe on trust because an unauthorised receipt cannot be acquired on behalf of the principal. Instead, their Lordships turned to questions of policy and practicality to achieve an outcome that is simple and certain.26

The Supreme Court reiterated Lord Templeman’s view in AttorneyGeneral for Hong Kong v Reid that bribery is an evil practice and noted that corruption was a current concern, both nationally27 and internationally. It followed that the law should be particularly stringent in relation to an agent who received a bribe or secret commission.28

  1. FHR European Ventures LLP v Mankarious [2013] EWCA Civ 17, [2014] Ch 1.

22 At [70] and [84].

23 FHR European Ventures LLP v Cedar Capital Partners LLC, above n 7.

24 As Master of the Rolls, Lord Neuberger delivered the judgment of the

Court of Appeal in Sinclair Investments v Versailles. In FHR European

Ventures LLP v Cedar Capital Partners LLC his Lordship effectively

overruled Sinclair in delivering the Supreme Court’s judgment as

President of the Court.

25 FHR European Ventures LLP v Cedar Capital Partners LLC, above n 7, at [10]

and [32].

26 At [35].

27 See the Bribery Act 2010 (UK).

28 FHR European Ventures LLP v Cedar Capital Partners LLC, above n 7, at [42].

Speaking for the Court, Lord Neuberger PSC observed that proprietary relief was the usual response to fiduciary wrongs. Where an agent acquired a benefit from his fiduciary position, the general equitable rule was that he was to be treated as having acquired the benefit on behalf of his principal. It was anomalous that bribes should be treated any differently:29

The expression equitable accounting can encompass both proprietary and non–proprietary claims. However, if equity considers that in all cases where an agent acquires a benefit in breach of his fiduciary duty to his principal, he must account for that benefit to his principal, it could be said to be somewhat inconsistent for equity also to hold that only in some such cases could the principal claim the benefit as his own property.

Accordingly, their Lordships embraced the wider proposition that an illicit gain, such as a secret commission, was owned by the principal, who was entitled to proprietary as well as personal relief against the agent.30

III Some Perspectives

A Categorising Unlawful Receipts

In FHR the Supreme Court noted that a principal is entitled to all unauthorised gains made in the course of an agency. The agent must deliver up any benefit he has obtained and:31

The only way that legal effect can be given to an obligation to deliver up specific property to the principal is by treating the principal as specifically entitled to it.

This reflects the view that when equitable jurisdiction is invoked against a faithless fiduciary, the remedies “are primarily restitutionary or restorative”.32

It is submitted that the basis of proprietary relief in FHR v Cedar Capital can be pared back even further and explained from a single perspective. An agent’s bribe or secret commission can be treated as a receipt on behalf of the principal because the agent lacks authority to acquire a beneficial

29 At [36].

30 At [33]–[51].

31 At [33]. This is analogous to the approach in Reid, which held that a

fiduciary does not acquire beneficial ownership of illicit gains. The Board

accepted that at law, the bribe money belonged to the recipient, Reid.

However, acting in personam, equity insists that it is unconscionable

for the fiduciary to retain any benefit resulting from a breach of duty.

As equity regards as done that which ought to be done, the moment the

bribe was received by the fiduciary, the money or its proceeds is held

on constructive trust for the principal. Reid effectively lacked status or

capacity in equity to hold the bribe (Attorney–General for Hong Kong v

Reid, above n 1, at 331).

32 Bristol & West Building Society v Mothew [1998] Ch 1 (CA) at 18 per Millett


interest in the property.33 There is no additional need to characterise the nature of the receipt. In other words, the focus is not on unconscionable retention but excess of authority. That is the sole determinant (for ease of reference, this will be called the “unitary standard”). In both cases the agent lacks capacity to assert beneficial receipt, but the unitary standard circumvents the need for elaborate transactional analysis, a finding of breach of fiduciary duty and further enquiry into the proprietary implications of that breach. This is a factual rather than a normative determination. The only relevant questions are (i) the existence of an agency, and (ii) whether the benefit was received by the fiduciary in the course of this agency. It is irrelevant whether she was performing duties contemplated by the agency or acting in breach of them. The only defence would be that beneficial receipt was authorised by the terms of the agency or sanctioned by the principal.34

The concept of proprietary disability is a thread running through equity jurisprudence. In academic literature, Lord Millett has made a notable contribution expounding the “good man” fiction in relation to bribes.35 Lord Millett argues that in the eyes of equity, fiduciaries are incorruptible. It follows that they never take bribes. Consistent with this theme, equity will treat the bribe in the fiduciary’s hands as a legitimate payment intended for the benefit of the principal.36 This shapes the remedial response:37

Once the fiduciary is precluded from asserting that it was intended for himself, therefore, a deemed agency gain or a bribe which is received by the fiduciary in kind ought in principle to be treated as trust property held in trust for the principal ...

In contrast, the unitary standard, put negatively but more realistically, is that any unauthorised receipt belongs to the principal. However, simplicity has a price. A unitary standard based solely on want of authority would effectively create an unqualified form of liability, whereas FHR v Cedar Capital’s liability is predicated on a wrong, namely receiving a benefit in breach of fiduciary duty (the “wrong standard”). In marginal cases each would produce a different result. Suppose a trustee receives an unsolicited gift from a broker with whom he has been conducting trust business. The broker deposits money in the trustee’s private bank account. The trustee does not become aware of

33 Insofar as this argument is tied to the concept of authority in agency law, it can be challenged on the basis that an agent does not, by becoming an agent, lose basic freedoms. From this perspective, authority is a positive conferral of power, not a restriction.

34 The former is particularly unlikely with respect to bribes.

35 Peter Millett “Bribes and Secret Commissions” (1993) 1 RLR 7.

36 At 20. AttorneyGeneral for Hong Kong v Reid, above n 1, approved this


37 Millet, above n 35, at 23. See further Lord Millett’s critical commentary

on Sinclair v Versailles in Lord Millet “Bribes and Secret Commissions

Again” (2012) 71 CLJ 583.

the payment for one month. Suppose further that the trustee is put into personal bankruptcy two weeks after the money was deposited. On the unitary standard the gift is an unauthorised acquisition and deemed a trust asset ab initio. On the wrong standard, the “innocent” receipt does not initially attract liability. A wrong arises if the trustee subsequently treats the money inconsistently with her obligations to the beneficiary. The money may form part of the trustee’s personal estate on the wrong standard but not on the unitary standard. With respect to the former, if the estate (including the gift) is distributed before the trust becomes aware of, and claims the gift, innocent third parties who have given value will obtain good title.38

The New Zealand position lies between the two models. Following Attorney–General for Hong Kong v Reid, liability is wrong–based, albeit that the principal’s interest in a bribe or secret commission would retrospectively vest from the date it was acquired by the false fiduciary.39

B Economic Rationale for Bribery

It must be questioned whether the case law in this area has placed sufficient emphasis on the economic backdrop of buying and selling goods or services.40 The general view is that a proprietary remedy can be sustained in the case of interceptive subtraction of the principal’s incoming and outgoing funds. Typically, the former occurs where the agent deducts a secret commission from funds originating from a third party that are intended for the principal. The latter occurs where the agent deducts a secret commission from the principal’s funds before remitting the net proceeds to the intended recipient.41 In contrast, receipt of a bribe directly from a third party was regarded as a separate and discrete transaction. Here, there was no proprietary base and the principal

38 It can be objected that when the trustee or her successor comes under a duty to hold the money on trust, the duty operates retrospectively to the date of receipt. However, breach of fiduciary duty renders a transaction voidable, not void. By analogy to rescission of a transfer of property by a beneficiary to a trustee, until the transaction is rescinded, the beneficiary has no proprietary interest in the property (Allcard v Skinner (1887) 36

Ch D 145 (CA); Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371). It follows that pending rescission, property can validly be transferred to an innocent third party who has given value.

39 As expressed in Attorney–General for Hong Kong v Reid, above n 1, at 331 per Lord Templeman, delivering the advice of the Board: “As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured.”

40 It is not suggested that this has been completely ignored in the cases, but rather that it has not been developed as a persuasive free–standing argument.

41 See, for example, Daraydan Holdings Ltd v Solland International Ltd [2004] EWHC 622 (Ch), [2005] Ch 119.

was confined to a personal order.42 However, in both sale and purchase transactions a bribe payment can be rationalised as an accretion to, or deduction from, the principal’s wealth. Where the principal is the vendor, a bribe or secret commission paid by the purchaser can be treated as part of the consideration. That is, the purchaser was willing to pay the contract price plus a further sum represented by the bribe. Similarly, where the principal is the purchaser, a bribe received by the principal’s agent can be regarded as a discount on the purchase price because the vendor was prepared to sell for less than the contract price.43 This reasoning should perhaps have been given greater emphasis in the cases,44 particularly given that it is only the fiduciary’s deception that prevents the principal from receiving the benefit directly.

C Bribery and Fiduciary Wrongs

The treatment of bribery is anomalous in the context of fiduciary wrongs. A fiduciary acting honestly (or at least not in flagrant disregard of his principal’s interests) who transgresses the profit or conflict rule may be visited with proprietary sanctions,45 whereas an agent who cynically receives bribes to betray his principal was confined to a personal restitutionary order.46 Thus the gravity of the wrong could work to the disadvantage of the betrayed principal. Such outcomes have been more readily extirpated in some settings than others. For example, it was formerly held that a master was not vicariously liable for fraudulent or dishonest acts committed by a servant for his own benefit, because such conduct was outside the scope of his employment.47 This reasoning was ultimately rejected by the House of Lords in Lloyd v Grace, Smith

& Co48 and denounced in later cases as an affront to common sense.49

The reticence of English law to reverse a similarly unsatisfactory state

of affairs with regard to bribery has understandably drawn criticism.50

Certainly FHR v Cedar Capital has now lifted bribery from the mire of a century old debate51 and addressed the morally inexplicable exclusion of

42 FHR European Ventures LLP v Mankarious, above n 21, at [28].

43 Fawcett v Whitehouse [1829] EngR 859; (1829) 1 Russ & M 132, 39 ER 51 (Ch).

44 It is not suggested that this reasoning has been entirely overlooked. See

for example, FHR European Ventures LLP v Mankarious, above n 21, at [8],

[9], [34], [67] and [110]. It has also been explained as a basis for money had

and received against the briber (Hovenden v Millhoff (1900) 83 LT 41 (CA)

at 43). However, it is submitted that this is a discrete basis for restitution,

which should be recognised as such.

45 Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46 (HL).

46 There was an exception if the principal could establish a proprietary

nexus with respect to the bribe.

47 Cheshire v Bailey [1905] 1 KB 237 (CA).

48 Lloyd v Grace, Smith & Co [1912] UKHL 1; [1912] AC 716 (HL).

49 Morris v CW Martin & Sons Ltd [1966] 1 QB 716 (CA) at 735–736 and


50 Grimaldi v Chameleon Mining NL (No 2), above n 4, at [572]–[582].

51 This may be an underestimate if the debate is reckoned from the celebrated

decision of Lister & Co v Stubbs, above n 10.

bribery from other forms of fiduciary wrong. Questions may remain as to the scope of the judgment.52 In view of its unqualified pronouncement that a bribe or secret commission is held on trust for the principal, it can be surmised that Sinclair v Versailles would now be decided differently. As noted, in that case the defendant was only personally accountable for profits gained by misuse of the claimant’s funds, which were used to artificially inflate the value of a separate company. While the claimant’s funds were instrumental in the defendant’s fraudulent scheme, the unlawful gains were solely attributable to sale of the defendant’s shares in a separate entity. It is suggested that in light of the Supreme Court’s ruling in FHR v Cedar Capital, these distinctions would not impede a proprietary order in respect of indirect gains deriving from a breach of fiduciary duty. Such gains would fall within the wider principle of “an opportunity which results from his fiduciary position”.53

D Institutional Constructive Trust

In contrast to Australia and New Zealand,54 English law has traditionally resisted the concept of a remedial constructive trust. This has impelled detailed scrutiny of the nature of the principal’s interest in a bribe and whether that interest can be cast as the subject matter of an institutional trust. These dynamics were frankly acknowledged by Sir Terence Etherton C in FHR European Ventures LLP v Mankarious:55

The present case is about the existence of a constructive trust, which is a true trust, of a benefit acquired by a fiduciary in breach of fiduciary duty. Short of a decision of the Supreme Court that the law of England and Wales recognises a remedial constructive trust, as is to be found in other common law countries, such as Australia, New Zealand and Canada, this court must proceed on the basis that in this jurisdiction the constructive trust of a benefit wrongly obtained by the fiduciary in breach of duty is an institutional trust arising at the moment the benefit is received and under which the principal obtains an immediate beneficial interest.

This constraint is evident even in Reid, perhaps the most doctrinaire of

52 See further Matthew Conaglen “Proprietary Remedies for Breach of

Fiduciary Duty” (2014) 73 CLJ 490.

53 FHR European Ventures LLP v Cedar Capital Partners LLC, above n 7, at

[7]. However, there are some vexing underlying issues. The defendant’s

shares were originally untainted. Their status changed when they were

subsequently used to realise illicit gains. If the shares or their traceable

proceeds were held by the defendant, a proprietary claim could be resisted

on the ground that the plaintiff’s interest is limited to the increase in share

value arising from the fraud. On the other hand, the plaintiff would have

a strong claim to security by way of an equitable lien over the shares or

their substitutes in respect of profts from the dishonest scheme.

54 See, for example, Bathurst City Council v PWC Properties Pty Ltd [1998] HCA

59[1998] HCA 59; , (1998) 195 CLR 566 at [40]; Wambo Coal Pty Ltd v Ariff [2007] NSWSC

589[2007] NSWSC 589; , (2007) 63 ACSR 429 at [40]; Commonwealth Reserves I v Chodar [2001]

2 NZLR 374 (HC) at [40]–[48] and [61].

55 FHR European Ventures LLP v Mankarious, above n 21, at [76]. See also

Westdeutsche Landesbank Girozentrale v Islington LBC, above n 7, at 714–716.

the decisions under review. The broad sweep of equitable doctrine was melded with proprietary concepts to explain the relationship between title, obligation and beneficial ownership. While there is no indication of a shift in position on remedial constructive trusts, this may now have limited relevance to proprietary claims to bribes and their proceeds in view of the Supreme Court’s unifying analysis of wrongful receipts and other equitable wrongs.

E Bribery and Secret Commissions Contrasted

Bribery and secret commissions are often referred to interchangeably,56 as if they are synonyms. Both of course are a corrupt receipt in the hands of the fiduciary. However, distinctions between the two have impeded cohesive discourse on the appropriate remedial response. This is particularly evident when the wrong is viewed in a spectrum composed of bribes, secret commissions and deemed agency gains. Proprietary and duty–based theorists have taken different positions in ascertaining which obligations along the fiduciary spectrum give rise to proprietary rights.

A bribe is paid for an agent to act disloyally. The transaction lies outside the fiduciary’s remit. Reid was bribed to betray his employer ’s public duty in prosecuting crime. His obvious obligation was to immediately desist and surrender to his employer the proceeds of his breach. Some commentators argue that this only engenders a personal remedy because the employer had no pre–existing interest in the bribe and such receipts fall outside the scope of the defendant’s employment.57 With respect to the unlawful receipts, there was no positive duty that the constructive trust could vindicate. In blunt terms: “a bribe paid to a fiduciary could not possibly be said to be an asset which the fiduciary was under a duty to take for the beneficiary”.58

Unless one adopts an obligation–based approach, as propounded in Reid, and extra–curially by Lord Millett,59 bribes and secret commissions are conceptually distinct and have different remedial outcomes. Typically, an agent receives a bribe directly from the briber. Secret commissions may be received in the same way, but not uncommonly they are subtracted by an agent who serves as a conduit for funds to or from the principal. Secret commissions are more conducive to the trust argument because the fiduciary can more appropriately be treated as having obtained the benefit for his principal.60 Where the fiduciary’s obligation includes

56 As in FHR European Ventures LLP v Cedar Capital Partners LLC, above n 7, at [1]; Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351 at [38]; Secretary of State for Justice v Topland Group plc [2011] EWHC 983 (QB) at [56], [58].

57 Birks, above n 9, at 388–389; Andrew Burrows The Law of Restitution (Butterworths, London, 1993) at 409–500; R M Goode “Ownership and Obligation in Commercial Transactions” (1987) 103 LQR 433.

58 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd, above n 5.

59 See also David Hayton “No Proprietary Liability for Bribes and Other

Secret Profits” (2011) 25 TLI 3.

60 See discussion of the economic implications, above.

making gains for the principal, the principal can adopt the fiduciary’s actions and claim ownership.61 The assertion of proprietary rights over the proceeds is more obviously convincing in this setting. This is particularly evident in less venal cases where an unauthorised receipt is more appropriately characterised as a deemed agency gain. For example, in Boardman v Phipps, 62 the fiduciary’s profits were not wrong per se, but (as the conflict rule instructs us) they should have been made on behalf of his principals. Again, the agent in FHR v Cedar Capital was engaged to negotiate the acquisition of a hotel on behalf of the purchasers. It is implicit in such arrangements that an agent will endeavour to achieve the most favourable terms for his principal. The secret commission, when appropriately accounted, was in practical terms a rebate on the purchase price.63 It was the principals’ property, and their claim had proprietary characteristics sufficient to support a constructive trust.

The long and inconclusive debate over bribes and secret commissions has been exacerbated by either a failure to distinguish the two wrongs or a failure to reconcile them within a unified remedial scheme. Of the two schools of thought, the “good man” fiction had the merit of encompassing all forms of wrongful receipt and to that extent foreshadowed FHR v Cedar Capital in the Supreme Court. While equity lawyers could look askance at the anomalous treatment of bribery, property lawyers sought an orderly arrangement of rights. The latter ’s reservations were in part prompted by the concern that a constructive trust would defeat the claims of the fiduciary’s creditors in the event of insolvency.64 Ultimately, this issue was dismissed in a single paragraph by the Supreme Court in FHR v Cedar Capital,65 where their Lordships opined that the proceeds of a bribe or secret commission are property which should not be in the agent’s estate at all.

F Restoration of Payment for Corrupt Services

Most cases focus solely on the principal’s claim to the bribe and its proceeds. There is a dearth of authority on the status of fees or remuneration paid by the principal to the false fiduciary. This is perhaps surprising because there is authority for the view that an agent may be required to restore any contractual benefit if his or her misconduct fundamentally undermines the parties’ relationship or the agent’s undertaking.

61 See Sarah Worthington “Fiduciary Duties and Proprietary Remedies:

Addressing the Failure of Equitable Formulae” (2013) 72 CLJ 720 at 732.

62 Boardman v Phipps, above n 45.

63 Similarly, as noted above, where an agent negotiates the sale of his

principal’s property and receives a secret commission from the purchaser,

the receipt can be treated as additional consideration improperly withheld

from the principal.

64 This concern was very much in evidence in Lister & Co v Stubbs, above

n 10, at 15.

65 FHR European Ventures LLP v Cedar Capital Partners LLC, above n 7, at [43].

In Stevens v Premium Real Estate Ltd,66 the vendors’ real estate agent assisted the purchaser ’s deception in acquiring the vendors’ property. The real estate agent was in breach of fiduciary duty and was ordered to (i) compensate the vendors for their loss in selling at an undervalue, and (ii) refund the sales commission.67 Where restorative awards are made in these circumstances, the courts are inclined to treat an agent’s commission or similar gain from the plaintiff as a contractual benefit for a service that has not been performed. In effect, a service performed corruptly is no service at all.68

In addition, the common law may provide a restitutionary remedy by reversing payments or other benefits received by the agent from the principal. Where an agent breaches his or her duty by taking a bribe or secret commission, the principal may recover remuneration paid to the agent on the basis that there has been a total failure of consideration in respect of the agency relationship.69 However, such relief is not readily granted unless the breach of fiduciary duty involves an element of dishonesty or bad faith.70

In Premium Real Estate, 71 the Supreme Court approved the reasoning in Imageview Management Ltd v Jack, 72 where an agent was liable to account for a fee received by way of secret commission and also required to make restitution for remuneration received from the principal. However, it is submitted that in both Premium Real Estate and Imageview, the reversal of payments or other benefits from the principal to the agent is better explained as an application of the common law principle of money had and received.73 If, however, this is an instance of equitable jurisdiction in

66 Stevens v Premium Real Estate Ltd [2009] NZSC 15, [2009] 2 NZLR 384.

67 Tipping J (at [102]) postulated three forms of monetary relief for civil

wrongs: compensatory damages, disgorgement damages and restorative

damages. Compensatory damages are loss-based and disgorgement

is gain–based. These are inconsistent remedies, requiring an election.

On the other hand, restorative damages entail restoring to the plaintiff

value transferred. Conceptually, compensatory and restorative damages

are not necessarily inconsistent and may be cumulative. Similarly, there

is no requirement for an election between restorative damages and an

account of profits due to the distinct non–compensatory nature of the


68 In Stevens v Premium Real Estate Ltd, above n 66, the agent’s conduct had

fundamentally undermined the parties’ relationship. The Supreme Court

held that the agent could not retain the commission due to its breach of

duty of loyalty (Elias CJ at [31]), breach of fiduciary duty and absence of

good faith performance (Blanchard, McGrath and Gault JJ at [89], [90]

and [94]) and conduct which “represented the antithesis of loyalty and

good faith” (Tipping J at [109]).

69 See Peter Watts “Restitution and Conflicted Agents” (2009) 125 LQR 369.

70 Kelly v Cooper [1993] AC 205 (PC) at 216–217.

71 Stevens v Premium Real Estate Ltd, above n 66, at [89].

72 Imageview Management Ltd v Jack [2009] EWCA Civ 63, [2009] 2 All ER 666.

73 See further Seb Oram, “Forfeiture of fiduciary remuneration following

breach of duty: from contract to conscience” (2010) LMCLQ 95.

respect of a fiduciary, then except in trivial cases,74 a conflict of interest may be sufficient for an agent to forfeit all remuneration. In both cases there are clear indications that the remedy was applied in respect of an equitable wrong. Elias CJ stated:75

An agent in breach of fundamental duties of loyalty imputed by equity cannot sue to recover commission to which he would otherwise have been entitled. The converse, that an agent cannot retain commission in circumstances where he is in breach of such duties, also follows.

Bribery cases have traditionally given little attention to reversing a transfer of wealth from the principal to the agent. 76 However, the reasoning in Premium Real Estate and Imageview potentially has broad application because the obligation arises from a breach of fiduciary duty, which is a common finding in most cases in this area.77

IV Conclusion

Certain statements in FHR v Cedar Capital can be viewed as having general application outside the realm of bribery. Most notably, the Supreme Court drew close to the Australian view that any benefits deriving from a breach of fiduciary duty are held on trust for the principal. Arguably, this is part of a trend towards a more purposive application of equitable doctrine.78

In any event, whether read in isolation or in a broader context, there is little doubt that the most significant legacy of FHR v Cedar Capital is that personal liability, traditionally expressed as an account of profits, may readily take the form of a proprietary remedy.

This is not to suggest that the former has been supplanted by the latter. The first and founding principle is that a delinquent fiduciary is personally accountable to the principal for the proceeds of a breach of duty. This was not in issue, even in Lister v Stubbs. The consequence of FHR v Cedar Capital is that the principal’s remedial options have been

74 The Court of Appeal in Imageview Management Ltd v Jack, above n 72, at

[44] used the term “harmless collaterality”.

75 Stevens v Premium Real Estate Ltd, above n 66, at [30] (footnotes omitted).

See similarly [90] per Blanchard, McGrath and Gault JJ and [109] per

Tipping J. Jacob LJ in Imageview Management Ltd v Jack, above n 72,

expressed a similar view at [50]: “We are here concerned not with merely

damages such as those for a tort or breach of contract but with what the

remedy should be when the agent has betrayed the trust reposed in him

– notions of equity and conscience are brought into play.”

76 In this context, typically, a commission or fee for an agent’s services or

remuneration to an employee.

77 On the common law analysis, a finding of actual disloyalty is probably

required to support the finding of a total failure of consideration in respect

of the agency relationship.

78 See, for example, Federal Republic of Brazil v Durant International Corp [2015]

UKPC 35[2015] UKPC 35; , [2016] AC 297, where the Privy Council emphasised that the

availability of equitable remedies ought to depend upon the substance of

a transaction and to that end the Board marginalised restrictions on the

tracing exercise that might produce inconsistent and unfair outcomes.

expanded. The principal can now advance a proprietary claim against bribes and secret commissions or their proceeds. By extension, the principal can trace into high value substitutes. However, there may be circumstances where proprietary relief is not sought. For example, the principal may renounce this option if, say, the exchange product is a volatile or wasting asset. In this case, the principal may simply wish to claim its value by means of a personal order.79

In FHR v Cedar Capital, the Supreme Court was mindful that the English position on bribes and secret commissions had long been adrift from the prevailing view in other Commonwealth jurisdictions.80 The nature and taxonomy of the wrong has attracted vigorous debate. Whilst discourse has been enriched by the diverse perspectives of restitution, property law and equity, there has been a marked failure to find common ground. It has taken a while to acknowledge perhaps the simplest proposition of all: that proprietary relief must be available in all cases to reverse enrichments from the corrupt exploitation of a fiduciary’s position. The deterrent principle which animates equity’s governance of fiduciary relationships demands nothing less.

79 This can be granted in conjunction with an equitable lien against the property, as security for any shortfall in respect of the judgment debt. See further Foskett v McKeown [2000] UKHL 29; [2001] 1 AC 102 (HL).

80 FHR European Ventures LLP v Cedar Capital Partners LLC, above n 7, at [45].

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