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BRIBES AND SECRET COMMISSIONS AGAIN

Published online by Cambridge University Press:  27 November 2012

Peter Millett
Peter Millett*
Affiliation:
Lord Millett is retired member of the Appellate Committee of the House of Lords.
*
Address for Correspondence: Lord Millett, Essex Court Chambers, 24 Lincoln's Inn Fields, London WC2A 3EG. Email: lordmillett@essexcourt.net.
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Abstract

Where a fiduciary receives a bribe or a secret commission in breach of fiduciary duty it remains controversial whether the bribe or secret commission will be held on constructive trust for the principal. The Court of Appeal has held that in most cases there will only be a personal liability to account. That is incorrect. The duty of the fiduciary is to serve the interest of the principal to the exclusion of his own interest. A fiduciary who keeps a profit for himself abuses the trust and confidence placed in him by the principal. He is bound to hand it over to his principal the moment he receives it. Equity's response to a breach of this duty is to enforce the duty by means of the constructive trust.

Keywords

Breach of fiduciary dutybribessecret commissionsaccount of profitsconstructive trusts
Type
Articles
Information
The Cambridge Law Journal , Volume 71 , Issue 3 , November 2012 , pp. 583 - 614
Copyright
Copyright © Cambridge Law Journal and Contributors 2012

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References

1 [1890] 45 Ch. D. 1.

2 (1880) 5 Exch. D 319 CA.

3 [2011] 4 All E.R. 335 CA.

4 Lindley, Cotton and Bowen L.JJ.

5 [1994] 1 A.C. 324 (on appeal from New Zealand).

6 Lord Templeman, Lord Goff, Lord Lowry, Lord Lloyd and Sir Thomas Eichelbaum (Chief Justice of New Zealand). The unanimous opinion of the Board was delivered by Lord Templeman.

7 [2011] 4 All E.R. 335 CA.

8 Lord Neuberger MR, Richards and Hughes L.JJ.

9 [2012] FCAFC 6. The judgment of the Court was delivered by Finn J., who as Dr. Finn was the author of the seminal work Fiduciary Obligations (Sydney 1977).

10 For brevity the author will simply refer to “bribes”, but this should be taken to include secret commissions and profits of all kinds.

11 His choice was conveniently selective, omitting the two most important articles on the subject (by Professor Gareth Jones) in (1968) 84 L.Q.R 472 and (1970) 86 L.Q.R 461 and three of the contributions (by Professor Austin, Lehane and Sir Anthony Mason) to Essays in Equity (Sydney 1985): see below p. 588. They all reject Lister v Stubbs.

12 Breach of Confidence (Law Com. No 110, 1981) HMSO Cmnd. 8388.

13 The protagonist is Sir Roy Goode, who is particularly concerned about the effect on the fiduciary's unsecured creditors should he become insolvent. His most distinguished opponent is Sir Anthony Mason (writing extra-judicially) in Essays in Equity op. cit.

14 England: Underhill, and Hayton, , Law of Trsusts And Trustees (18th ed., 2010)Google Scholar; Oakley, A.J., Constructive Trusts (2nd ed., 1987)Google Scholar; Snell's Equity 32nd ed. (London 2010); Goff, and Jones, , The Law of Restitution (7th ed., 2006)Google Scholar; Thomas and Hudson, The Law of Trusts (2nd ed., 2010). Australia: Jacobs, The Law of Trusts in Australia (1977); Meagher, Gummow and Lehane, Equity, Doctrines and Remedies (4th ed. 2009): Finn, Fiduciary Obligations (1978). USA: Scott on Trusts (4th ed., 1998); Story on Agency (2004). Canada: Waters, Donovan, The Law of Trusts in Canada (3rd ed., 2005)Google Scholar. Hong Kong: Ma, Equity and Trusts Law in Hong Kong (2009). A notable but recent exception is Virgo, The Principles of Equity and Trusts (2012).

15 Wilberforce J did not require any more in Phipps v Boardman [1967] 2 A.C. 46. (See the discussion of the case below).

16 [1967] 2 A.C. 46, 117.

17 The cases of monetary bribes are almost all of this character. Some of the bribes have been for as little as £75. In such cases judgment for the amount of the bribe is all that is sought or required. It by no means follows that the money was not held on trust before it was dissipated in breach of trust.

18 As in Tyrell v Bank of London (1862) 10 H.L.Cas. 26; Phipps v Boardman (note 15 above).

19 As in Tyrell v Bank of London and Hospital Products Ltd. v United States Surgical Corp (1984) 156 C.L.R. 41.

20 (1873-4) L.R. 9 Q.B. 480 (not cited in Sinclair v Versailles).

21 Lord Cockburn C.J., Blackburn and Archibald J.J.

22 For the relevance of this qualification, see note 41 below.

23 Ibid., at p. 484.

24 Re North Australian Territory Co. (Archer's case) [1892] 1 Ch. 322 CA.

25 It is otherwise as between the creditor and a third party, for a debt is a chose in action which belongs to the creditor and may be assigned by him.

26 The cases are collected in Goff and Jones, The Law of Restitution (8th ed.) ch. 8.

27 This is a real trust with the usual consequences and not merely another way of saying that the contract is specifically enforceable: see Lake v Bayliss [1974] 1 W.L.R 1073. Even if there is no enforceable contract (perhaps for want of formality) payment of the purchase money brings a constructive trust into being, because it would be unconscionable for the owner to keep both the land and the money.

28 In Essays in Equity (note 11 above) Professor Austin listed 15 such situations, including the making of an improper profit by a trustee.

29 As has been seen, these rules were not unique to equity, though the textbooks on equity seldom mention the fact. Since the Judicature Acts there is no need to invoke the common law.

30 [1942] 1 All E.R. 378, at 386, where the bona fides of the directors was not questioned, and the company could not have obtained the profit for itself; and see Hospital Products Ltd. v United States Surgical Corporation (note 19 above) per Mason J. at pp. 107–8. The former was cited to the court but not referred to in the judgment in Sinclair v Versailles; despite being one of the most important cases on fiduciaries in the 20th Century, the latter was not cited.

31 Ibid., per Lord Wright at p. 394 affirmed in Phipps v Boardman (note 15 above); and see Furs Ltd. v Tomkies [1936] 54 C.L.R 583 per Rich, Dixon and Evatt JJ. (not cited in Sinclair v Versailles).

32 Or, as judges used to say, ex debito justitiae.

33 As he did in both Lister v Stubbs and Reid.

34 Bray v Ford [1896] A.C. 44, at 50-51 per Lord Herschell. The point has been frequently made.

35 Op. cit. (note 14) at p. 492.

36 Parker v McKenna (1874) 10 Ch. App 96 at pp. 124–5 per James L.J. cited with approval by Lord Wright in Regal v Gulliver (and frequently since). The rules would be more effective if fiduciaries read the law reports.

37 [1948] Ch. 46 (not cited in Sinclair v Versailles).

38 See for example Re Smith [1896] 1 Ch. 71 (not cited in Sinclair v Versailles).

39 (1829) 1 R. & M. 132 at 149 (not cited in Sinclair v Versailles).

40 This was the position in Lister v Stubbs itself.

41 Many commercial agents are contractually authorised to receive money on their principal's behalf, employ the money for their own purposes, and account to the principal periodically for money received since the last account. Where such an agent takes a bribe, the principle that it is to be treated as received on his principal's behalf does not affect the agent's right to retain the money and employ it as part of his own cash flow until the next period of account. The money is not held in trust but simply treated on the same basis as any other sum received for the principal's account.

42 Barclays Bank v Quistclose Investments Ltd. [1970] A.C. 567; Twinsectra Ltd. v Yardley [2002] 2 A.C. 164.

43 [1999] 1 All E.R. 400 CA.

44 See Hospital Products Ltd. v United States Surgical Corp (note 19 above) per Mason J. quoting Cardozo J.

45 Note 2 above.

46 The rule was confirmed by s. 25(3) of the Judicature Act 1873, which provided that no claim by a cestui que trust against his trustee for any property held on an express trust, or in respect of any breach of such trust, should be held to be barred by any statute of limitation.

47 See the classic judgment of Lord Redesdale in Hovenden V Lord Annesley (1806) 2 Sch. & Lef. 607 at pp. 633–4.

48 Equity, Doctrines and Remedies, op cit., at para 538.

49 Lord Esher M.R., Bowen and Kay L.JJ.

50 [1893] 2 Q.B. 390.

51 He paid interest on the money he retained to the will trustees.

52 See note 1 above.

53 Grimaldi v Chameleon Mining NL (No.2) note 9 above.

54 See p. 610 below.

55 The second does not appear to have arisen in practice. Corrupt fiduciaries seem never to become bankrupt.

56 See p. 596 above.

57 Re Morvah Consols Mining Co. (1875) 2 Ch.D. 1 CA; Re Caerphilly Colliery Co. (1877) 5 Ch.D. 336 CA; Eden v Ridsdales Railway Lamp and Lighting Co. Ltd. (1889) 23 Q.B.D. 368 CA.

58 See note 39 above.

59 (1856)3 Sm. & G 192.

60 See note 31 above and p. 610 below.

61 [2005] Ch. 119.

62 See p. 584 above.

63 It has no parentage save possibly the judgment of James L.J. in Metropolitan Bank v Heiron.

64 For a tentative list see Professor Austin's contribution to Essays in Equity (note 11 above).

65 See Lord Upjohn's dissenting speech in Phipps v Boardman (note 15 above) and see below p. 610.

66 The same of course applies to the opportunity for profit.

67 As in Phipps v Boardman (note 15 above) and Hospital Products Ltd. v United States Surgical Corp (note 19 above) for example.

68 As in Tyrell v Bank of England for example.

69 See Lord Cranworth's speech in Tyrrell v Bank of London (note 19 above).

70 Advice to the purchaser's agent: if you are offered a bribe by the vendor, make sure you receive it before your principal pays any part of the purchase price; and to be on the safe side ask for the bribe to be paid by a different entity, such as a different company from the company to which the purchase money will be paid. That will not relieve you of the liability to account for the bribe, but you will be free to invest it and keep the profit.

71 Such as Reid itself, and A.G. v Goddard (1929) 98 L.J.K.B. 743, where a police officer in the vice squad was bribed not to report brothel keepers.

72 (1811) 170 E.R. 1300.

73 Note 39 above.

74 The case was affirmed on appeal.

75 (1856) 3 Sm. & G. 192.

76 He also removed the person who paid the bribe from the trusteeship, so that he not only lost the money but the office he had paid for. Serves him right!

77 [1927] 2 Ch. 9.

78 Note 19 above.

79 Note 15 above.

80 Read entered into a backdated agreement to convey a one half share in the land which he had acquired to Tyrell for no consideration. Quite apart from the fact that the transaction was a fraud on the bank, the absence of consideration rendered the agreement unenforceable. The head note records that Tyrell owned a half share in the land, which seems incorrect. He was not entitled to anything unless and until a part of the land was sold, and then he was not entitled to a half share in the proceeds of sale but only to a half share in the net profits.

81 27 Beav. 273.

82 Lord Westbury L.C., Lord Cranworth and Lord Chelmsford.

83 Note 39 above.

84 Note 15 above.

85 A copy of the order is held by the library of Lincoln's Inn.

86 Lord Hodson and Lord Guest.

87 Lord Cohen.

88 He did not agree that the defendants were in breach of trust at all. His speech is the best regarded and the most commonly cited.

89 If information is property it is of a very unusual kind, since it can at one and the same time be disposed of and yet retained.

90 Op. cit., note 14 above, at p. 512.

91 Note 61 above, at p. 863.

92 (1978) 52 A.L.J.R. 399

93 [1974] 1 N.S.W.L.R. 443, at 470-471.

94 Note 11 above.

95 Not cited in Sinclair v Versailles.

96 (1937) 58 C.L.R 1, at p. 39 (not cited in Sinclair v Versailles).

97 The curiosity is that Lindley L.J. of all people should invoke the common law rule to govern a fiduciary relationship.

98 [1957] 100 C.L.R 342, at p. 350 with whom McTiernan and Fullagar JJ. agreed.

99 (1983) 154 C.L.R 178, at p. 199 (not cited in Sinclair v Versailles).

100 Note 19 above, at para 96 et. seq.

101 In the author's respectful opinion the greatest equity judge of the late 20th Century.

102 In Beatty v Guggenheim Exploration Co. (1919) 225 N.Y. 380.

103 Note 31 above.

104 Note 9 above.