Law of Trust –Secret Commission& Bribes /Constructive Trust

Bribes & Secret Commission – Proprietary Claim or Personal Claim?

Issue : the state of the law when a fiduciary receives a bribe to promote some
wrongdoing in breach of his fiduciary duties.

Where the defendant has profited from the commission of a wrong/ receives a bribe , it is
sometimes possible for the defendant to be liable to account for the value of the profit
received. This is the usual remedy where the defendant has profited from a breach of
fiduciary . This is a personal claim. But there has been cases where the court have
converted into proprietary remedy, by concluding that the profit is held on constructive
trust.

Two contrasting views were adopted by the courts:

1. On one hand , the fiduciary becomes accountable to his principal and the
circumstances give rise to a personal remedy of an account – Lister v Stubbs
(1890)
2. On the other hand, the Privy Council in AG for Hong Kong v Reid (1994)
decided that a fiduciary holds the bribe and its traceable proceeds on
constructive trust for the aggrieved party and this gives rise to a proprietary
claim.

COA in Sinclair Investment v Versailles(2011) , is in favour of a personal claim

against the fiduciary .The COA decided to be bound by its decision in Metropolitan Bank
v Heiron (1880) and Lister v Stubbs and other three cases to hold that the receipt of a
bribe does not normally give rise to a constructive trust.

- specific reference to Lord Neuberger’s judgment

This issue must also be considered in the light of the recent COA decision and Supreme
Court of FHR European Ventures LLP v Mankarious

Prepared by : Anne Shyamala 1

LLB ( Hons ), LLM ( Malaya)
Senior Lecturer
Law of Trust –Secret Commission& Bribes /Constructive Trust

Lister v Stubbs ( 1890 ) CA

1. The COA held that where a fiduciary receives a bribe or secret commission,
he does not hold it in trust for the principal. The relationship between them is
that is a debtor and creditor, not a trustee and beneficiary. Therefore the COA
dismissed the application because it said the defendant did not hold the
commission or proceeds on trust for his employees but merely their debtor .

2. Lindley LJ ,

“Then comes the question as between employer and employee: whether (the
employee) can keep the money he has received without accounting for it?
OBVIOUSLY NOT, I apprehend that he is liable to account for it the moment
that he gets it. It is an obligation to pay and account to (the employer)... But
the relation between them is that of a debtor and creditor; it is not that of a
trustee and cestui que trust”

3. Lindley LJ stated that to hold them as trustees and beneficiary would have
consequences that would not be right

a. If ( the employee ) were to become bankrupt , this property acquired by

him with the bribe would be withdrawn from the mass of his creditors and
be handed over bodily to the employer
b. The employer would compel the employee to account to them, not only
for the money with interest, but for all the profits which he might have
made by embarking in trade with it.

4. Lister has been subject of widespread criticism.

Peter Millett – there were only two reasoned judgment . Cotton LJ relied on
his own judgment in the case of Mertropolitan Bank V Heiron. Lindley LJ
cited no authority , but denied that the defendant had obtained the bribe as
the plaintiff’s agent , by which he presumably meant that the bribe was
intended for the defendant personally so that its receipt was outside the
scope of his agency

5. Lister has its academic supporters notable Prof Birks and Prof Goode. But
the overwhelming preponderance of academic opinion is hostile. Some critics
have pointed out that the rule is anomalous in that it appears to be confined
to bribes and secret commission which are paid in money and not to apply
to those which are received in kind.
6. Those who support the decision are motivated by what they perceive to be an
injustice to the creditors of an insolvent fiduciary if a proprietary remedy is
made available to his principal to enable him to obtain windfall profit and not
merely the restoration of his own property.

AG for Hong Kong v Reid ( 1994) PC ( New Zealand)

1. Privy Council in this case had clearly settled that a trustee or other fiduciary, who
exploited his office so as to receive a bribe or secret profit, held such sum and its
Prepared by : Anne Shyamala 2
LLB ( Hons ), LLM ( Malaya)
Senior Lecturer
Law of Trust –Secret Commission& Bribes /Constructive Trust

traceable proceeds on a constructive trust for the beneficiaries or other persons

to whom he owed a fiduciary duties, just as if he had exploited property subject to
a trust or other fiduciary obligation.

The PC held unanimously that Lister was wrongly decided as matter of English
law.

2. Lord Templeman stated

“ when a bribe is offered and accepted in money or in kind , the money or

property constituting the bribe belongs in law to the recipient. Money paid to the
false fiduciary belongs to him. The legal estate in the freehold property conveyed
to the false fiduciary by way of bribes vests in him

Equity, however, which acts in personam, insists that it is unconscionable for a

fiduciary to obtain and retain a benefit in breach of duty. The provider of a bribe
cannot recover because he committed a criminal offence when he paid the bribe.
the false fiduciary who received the bribe in breach of duty must pay and
account for the bribe to the person to whom that duty was owed.”

3. Unfortunately, the Privy Council ` relied in part on the maxim that ‘ equity
regards as done that which ought to be done’. As stated by Lord Templeman

“ As soon as the bribe was received it should have been paid or transferred
instance to the person who suffered from the breach of duty . Equity considers
as done which ought to be done. As soon as the bribe was received, whether in
cash or in kind the false fiduciary held the bribe on constructive trust for the
person injured “

This aspect of the judgement has been subject to much criticism . It is asserted
that it is not therefore a doctrine which applies to wrongdoing at all.

Lord Templeman met the objection regarding pre existing property rights by
invoking the maxim that ‘ equity regards that as done which ought to be done”
The dishonesty fiduciary is under an obligation to transfer the bribe to the
beneficiary immediately upon receipt. Equity regards this payment as made from
the moment of receipt ; hence, a constructive trust arises as soon as the bribe is
received.

4. This decision was influenced by the House of Lords decision in Boardman v

Phipps which according to Lord Templeman
“ demonstrates the strictness with which equity regards the conduct of a
fiduciary and the extent to which equity is willing to impose a constructive trust on
property obtained by a fiduciary by virtue of his office”.

He concluded
“ If a fiduciary ( like the solicitors to the trustees in Boardman) acting honestly
and in good faith and making a profit for himself ( by virtue of his office)
becomes a constructive trustee of that profit , then it seems to their Lordship that
Prepared by : Anne Shyamala 3
LLB ( Hons ), LLM ( Malaya)
Senior Lecturer
Law of Trust –Secret Commission& Bribes /Constructive Trust

a fiduciary acting dishonestly … and criminally who accepts a bribe must also be
a constructive trustee and must not be allowed by any means to make any profit
from his wrongdoing.”

5. Endorsing the decision in Reid, the High Court in Daraydan Holdings Ltd v
Solland Interiors Ltd decided that a fiduciary who receives a bribe or secret
commission becomes a constructive trustee .

6. The rule of equity is that a fiduciary must not place himself in a position where
his interest may conflict with his duty , and must not make profit for himself out of
his position without his principal ‘s consent and a fiduciary will not be allowed to
retain any advantage acquired in violation of the rule. The object of the law is not
compensatory. The principal is not given a remedy in order to compensate him
for loss; he is entitled to recover whether or not he has suffered loss. The
principal is given a remedy because this is considered necessary to enforce the
high standard which equity demands of a fiduciary. A fiduciary who fails to
observe them must be stripped of every advantage which he has obtained
thereby; better that the principal should receive a windfall than that the fiduciary
( or his creditors) should benefit (Peter Millet)

Sinclair Investment ( UK) Ltd v Versailles Trade Finance Lt ( 2011) EWCA Civ
(2012)

The COA ‘s decision in this case has provoked a fierce debate.

Facts : Funds were received by the defendant group of companies for the purchase of
goods on behalf of investors( claimant) . The defendants defrauded the claimants and
used the funds for their own purpose . The effect of the fraud excessively inflated the
value of the shares of the defendants companies. Some of the shares in the defendant
companies were sold and proceeds were distributed to various parties . The claimant
investors suffered substantial losses and asserted a proprietary claim to the proceeds of
sale of the shares which alleged were held on constructive trust for them.

1. The High Court ( Lewinson J) and the Court of Appeal ( Lord Neuberger,
Richards and HughesLJJ) dismissed the claim and decided that the claimants were
entitled to an equitable account in respect of the money acquired by the fiduciary. The
shares in the defendant group of companies were not beneficially owed by the claimant
.
The COA refuse to follow the ratio of the Privy Council in AG for Hong Kong v Reid that
bribe or secret commission obtained by trustee or fiduciary exploiting his fiduciary
position is held on constructive trust for his beneficiaries . Instead, the COA followed the
ratio of the Court of Appeal in Lister v Stubbs , that only a personal liability arose.

2. COA followed Lister v Stubbs and said that “there was a real case for saying that
Reid was “unsound”. (para80)

“ in cases where the fiduciary takes for himself an asset which if he chose to take, he
was under a duty to take for the beneficiary . However, a bribe paid to a fiduciary could

Prepared by : Anne Shyamala 4

LLB ( Hons ), LLM ( Malaya)
Senior Lecturer
Law of Trust –Secret Commission& Bribes /Constructive Trust

not possible be said to be an assets which the fiduciary was under a duty to take for the
beneficiary. There can thus be said to be a fundamental distinction between

1. A fiduciary enriching himself by depriving a claimant of an asset and

2. A fiduciary enriching himself by doing a wrong to the claimant “

At para 88, Lord Neuberger somewhat enlarged the first of those categories by including
in it a situation where:

“the trustee acquired the assets or money by taking advantage of an opportunity or right
which was properly that of the beneficiary”

3. Therefore in cases where a fiduciary takes an asset which, if he choose to take ,

he was under a duty to take for the beneficiary , it is easy to see why the asset should be
treated as the property of the beneficiary. But however, a bribe paid to a fiduciary could
not be said to be an asset which the fiduciary was under a duty to take for the
beneficiary.

This argument can be seen in the case of Metropolitan Bank v Heiron (1880) ( which
was cited in Sinclair), where the COA decided that a director of a company who
received a bribe was able to plead successfully a limitation defence on the ground that
the company could not treat the bribe as the property of the company .

4. COA stated (para88) “ a beneficiary of a fiduciary duties cannot claim a

proprietary interest, but is entitled to an equitable account, in respect of any money or
asset acquired by a fiduciary in breach of his duties to the beneficiary, unless , the asset
or money is or has been beneficially the property of the beneficiary or the trustee
acquired the asset or money by taking advantage of an opportunity or right which was
properly that of the beneficiary

5. In Sinclair , Lord Neuberger asked a rhetorically “ why, it may be asked, should

the fact a fiduciary is able to make a profit as a result of the breach oh his duties to a
beneficiary, without more, give the beneficiary a proprietary interest in the profit ?

According to Peter Millet “Bribes and Secret Commission again” (CLJ)(2012) stated
the answer is that the essential evil of bribery is betrayal of trust. By accepting a bribe,
the recipient is acting in his own interests or those of the person who paid bribe, and
betraying the trust of his principal. The relationship between the fiduciary and his
principal is a relationship of trust and confidence. The duty of the fiduciary is to serve the
interest of the principal to the exclusion of his own, and the beach of this duty does not
consist of making profit but in keeping it for himself. This is not a breach of a personal
obligation but it is an abuse of the trust and confidence placed on him by his principal
who put him in a position to make profit because he trusted him not to serve his own
interest by making for his own benefit. Equity’s response to the breach of this trust is not
to be redress for the breach but to enforce the duty; the constructive trust is the means
by which it does so. The principal’s beneficial interest in the profit is thus inherent in the
very concept of a fiduciary relationship. It is an incident of the relationship that an
advantage or profit which the fiduciary may obtain by virtue of the relationship is in the
eyes obtained for the benefit of his principal and belongs beneficially to him.
Prepared by : Anne Shyamala 5
LLB ( Hons ), LLM ( Malaya)
Senior Lecturer
Law of Trust –Secret Commission& Bribes /Constructive Trust

According to Peter Millet, Lord Neuberger observed that the majority of academic
articles on the question supported Lister v Stubbs and that while most of the textbook
on equity took the opposite view their discussion of the subject was cursory . He has
failed to mention that the Law Commission ( - Breach of Confidence 1981) considered
the question and concluded that Lister v Stubbs does not represent the law.

He stated that the decision ignores the fiduciary relationship altogether and treats the
fiduciary as he were stranger to any trust or confidence reposed in him.

FHR European Ventures LLP v Mankarious (2013) EWCA Civ 17

1. One of the grounds of appeal in this case is that Sinclair Investment was wrongly
decided. The COA clearly stated that that is for the Supreme Court to decided.
The COA stated that this case is factually different from the facts considered in
Sinclair Investment.
As such the appellants referred to a number of authorities which had not been
cited in Sinclair Investment ; and argued that the secret commission amounted to
an opportunity of the kind which it is the fiduciary ‘s obligation to introduce to his
principal , and was therefore subject to a proprietary claim. They succeeded.

2. Ehtherton stated at para 75, the constructive trust of equity which arises in
many different areas of law. They include among others, contracts for sale of
land, the perfection of imperfect gifts, gifts in contemplation of death,
testamentary secret trust …. Although it may be said at the most general level
that the constructive trust is a feature of equity to prevent or remedy
unconscionable conduct, there is no generally accepted set of principles
governing the existence of a constructive trust across all the different areas of
law where it is to be found. Moreover, in some cases the constructive trust is a
trust institutional trust arising by operation of law at a particular moment and
creating a property interest in the beneficiary from that time. In other cases, it
simply connotes an obligation in equity of wrongdoers, who were not or are not in
fact trustees, to account as though there were.

Sinclair confirms that not all benefits wrongly obtained by a fiduciary in breach of
fiduciary duty are subject to a constructive trust even though the fiduciary is till
under a duty to account in equity. The problem is to identify when such situation
arises and specifically whether the facts are such situation .

3. The COA agreed with Lewison LJ that it is not the function of the COA to enter
into debate about whether or not Lister or Reid in Sinclair Investments was
correctly decided or incorrectly decided.

In applying Sinclair , with reference to Lord Neuberger’s analysis in para 88 & 89

, Sinclair divides into 3 broad categories the situations in which a fiduciary
obtains a benefit in breach of fiduciary duty .

Prepared by : Anne Shyamala 6

LLB ( Hons ), LLM ( Malaya)
Senior Lecturer
Law of Trust –Secret Commission& Bribes /Constructive Trust

The first category is where the benefit is or was an asset belonging to the
principal.
The second category is where the benefit has been obtained by the fiduciary by
taking an opportunity which was properly that of the principal .
The third category is all other cases

The situation in category 1 & 2 gives rise to a constructive trust , but those in
category 3 do not . The issue that the COA had to address in this case was the
difficulty of ascertaining the borderline Category 2 and 3 .

Upon much analysis the COA held that the case fell within Category 2 though
there was considerable difficulties inherent in the analysis in Sinclair Investment
and the decision in Lister in marking the borderline between cases in Category 2
and 3.

As such this has made the law more complex and uncertain and dependent on a
very fine factual situation.

4. Ehtherton C concluded by saying that there is a need for informed debate and
ultimately determination by the Supreme Court on

a. Whether Sinclair Investment was right to decide that Lister is to be preferred to

Reid
b. In terms of constructive trust and proprietary relief for breach of fiduciary duty,
what are the principles to distinguish opportunity cases within category 2 and
those in category 3
c. What is the true jurisprudential nature of the constructive trust in this areas
whether it is – or should be – an institutional trust at all or something else.

Note

1. Grimaldi v Chameleon Mining NL (2012) , the Full Federal Court of Australia

considered and convincingly rejected Lister v Stubbs and Sinclair v Versailles
and followed Reid, and held that a fiduciary who receives a bribe does indeed
hold it in trust for his principal. It held that a remedial constructive trust was
available if needed ‘to achieve a practical justice “ in the circumstances . Finn J ,
the court said to exclude the bribed fiduciary from the deterrent effect of the
constructive trust is, in our view, to make it unavailable in the very situation
where deterrence is most needed. Bribery at its most naked breeds the crudest
form of fiduciary infidelity.

2. Sinclair concerned breach of fiduciary duty by a company director. Bribes and

secret commission were not in issue but the case in this area was regarded as
being directly relevant. This begs the question as to whether the court’s
pronouncements will have general application and if, so , the extent to which they
will redefine the boundaries for equitable wrongs.

Prepared by : Anne Shyamala 7

LLB ( Hons ), LLM ( Malaya)
Senior Lecturer
Law of Trust –Secret Commission& Bribes /Constructive Trust

FHR European Ventures LLP v Mankarious (2014) UKSC 45

The Supreme Court dismisses Cedar Capital appeal. Lord Neuberger gives the
judgment of the court.

1. Where an agent acquires a benefit which came to his notice as a result of his
fiduciary position, or pursuant to an opportunity which results from his fiduciary
position, the general equitable rule ( the Rule) is that he is to be treated as
having acquired the benefit on behalf of his principal, so it is beneficially owned
by the principal , so it is beneficially owed by the principal . The dispute in this
case is the extent to which the Rule applies where the benefit is a bribe or secret
commission obtained by an agent in breach of his fiduciary duty to his principal.
2. While is not possible , as a matter of pure legal authority, to identify any plainly
right or plainly wrong answer to the issue of the extent of the Rule ,
considerations of practicality and principle support the case that a bribe or secret
commission accepted by an agent is held on trust for his principal .
3. An agent owes a fiduciary duty to his principal because he is someone who has
undertaken to act for or on behalf of his principal( which gives rise to a
relationship of trust and confidence). As a result the agent must not make profit
out of his trust and must not place himself in a position which his duty and
interest may conflict.
4. Lord Neuberger delivering the judgement of the court, took the opposite view
from that which he adopted in Sinclair . The SC held that the general rule was
that any benefit acquired by an agent as a result of his agency and in breach of
his fiduciary duty is held on trust for the principal . This would give the principal
the right to choose either a proprietary claim against the asset or its proceeds , or
the remedy of account in equity. The Supreme Court therefore reintroduced the
rule applied in AG for Hong Kong v Reid (1994) .

5. Lord Neuberger :“ The respondents formulation of the Rule has the merit of
simplicity: any benefit acquired by an agent as a result of his agency and in
breach of his fiduciary duty is held on trust for the principal. On the other hand ,
the appellant’s position I more likely to result in uncertainty. Thus, there is more
than one way he normal rule, which one can identify the possible exceptions to
the normal rule, which results in a bribe or commission being excluded from the
Rule…… Clarity and simplicity are highly desirable qualities in the law. Subtle
distinctions are some times inevitable , but in the present case, as mentioned in
the absence of any other good reason, it would seem right to opt for the simple
answer “.

6. Lord Neuberger asserted that ; It was not possible to identity any plainly right or
plainly wrong answer to the issue of the extent of the Rule , as a matter of pure
legal authority”.

a. Practical consideration : Lord Neuberger considered the Buyer’s

argument that the Rule applied to all unauthorized benefits, and favoured
this approach given that it had the merit of simplicity. Since there was no
other good reason to do otherwise , and since the authorities , did not
preclude the court from taking an expansive view of the Rule, it seemed
right to the court to opt for the simplest solution.

Prepared by : Anne Shyamala 8

LLB ( Hons ), LLM ( Malaya)
Senior Lecturer
Law of Trust –Secret Commission& Bribes /Constructive Trust

b. Policy Consideration : The Supreme Court was persuaded by Lord

Templeman in AG for Hong Kong v Reid in which Lord Templeman stated
that ‘bribery is an evil practice which threaten the foundations of any
civilized society. Lord Neuberger emphasized that secret commission
undermines trust in the commercial world and that the law should
particularly strict towards agents who have received bribes and secret
commission.
c. Harmonisation : Lord Neuberger also suggested that it would be useful
for the English courts to follow the approach in overseas jurisdictions and
to develop common law round the world .

7. Perhaps the most controversial aspect of the decision arises from the
consequence that is the beneficiary has a proprietary claim in respect of a bribe
as opposed to merely personal claim , then that claim will rank ahead of the
claims of any unsecured creditors of the defaulting fiduciary.

8. “ The notion that the Rule should not apply top a bribe or secret commission
received by an agent because it could not have been received by or , on behalf
of the principla seems unattractive. The whole reason that the agent should not
have accepted the bribe or commission is that it puts him in conflict with his duty
to his principal. “ – As Peter Millet argued that regardless of the source of the
bribe a or the intention of the briber as to the bribe’s ultimate destination, the
essential mischief is the same ; the bribe deprives the principal of his right to the
undivided loyalty of his fiduciary and that loyalty should be upheld by a
constructive trust.

Prepared by : Anne Shyamala 9

LLB ( Hons ), LLM ( Malaya)
Senior Lecturer