David Lord QC and Stuart Cutting appeared for the Appellants in a significant decision of the Court of Appeal on broker secret commission handed down today in the conjoined appeals of Wood v Commercial First Business Ltd & ors and Business Mortgage Finance 4 plc v Pengelly [2021] EWCA Civ 471.
The appeal of the Assignees was dismissed in the lead judgment given by David Richards LJ (with Males LJ and Elisabeth Laing LJ in agreement).
Background Facts
The original mortgagee in both cases was Commercial First Business Ltd (“CF”) and the broker was UK Mortgage and Financial Services Ltd (the “Broker”). In both cases the mortgages were subsequently assigned to various third parties (the “Assignees”).
Wood
Mrs Wood took out two mortgages (26 May 2006 and 12 July 2007) and a further advance under the first mortgage (30 November 2007), which were secured against Mrs Wood’s farms. As the mortgages were commercial they were unregulated.
Mrs Wood paid a fee to the Broker in respect of the first mortgage and the further advance, but no broker’s fee was paid in respect of the second mortgage.
The Broker received commission from CF in relation to the two mortgages and the further advance (being either 3% or 4% of the amount of the advance). CF did not disclose the fact or the amount of these payments to Mrs Wood as they required the Broker to do so.
Pengelly
Mr Pengelly took out a single mortgage (11 January 2006), which was secured against a barn on Mr Pengelly’s farm. As the mortgage was commercial it was unregulated.
Mr Pengelly paid a fee to the Broker Fee. The Broker received commission from CF in relation to the mortgages (being 3% of the amount of the advance). CF did not disclose the fact or the amount of this payment to Mr Pengelly as they required the Broker to do so .
No Requirement for a Fiduciary Relationship
If a “a fiduciary relationship” is required as a pre-condition for remedies in respect of bribes or secret commissions the inherent risk is either that civil remedies which should be available will be denied because there is not a fiduciary relationship, or that the term “fiduciary relationship” will be applied so widely as virtually to deprive it of content [46]. To ask in cases of this kind whether there is a fiduciary relationship as a pre-condition for civil liability in respect of bribes or secret commissions is an unnecessarily elaborate, and perhaps inaccurate, question [48]. It is the content of the duty, not the label attached to it, that matters, which is in accordance with the authorities as well as with principle [50]. The Court acknowledged that in a significant number of authorities, particularly recently, the liability of the payer and recipient of the bribe or secret commission was in terms of a “fiduciary duty” and an accessory liability for the payer (at [73] and [87]). However, such references were only in a “wide” and “very loose sense” ([73] and [79]).
It should be noted though in the case of a “half-secret commission” the Court of Appeal in Hurstanger Ltd v Wilson and Anthr [2007] 1 WLR 2351 made it clear that it is necessary to establish a fiduciary relationship [119] and [128].
Requisite Duty Owed by Payee
With there being no need for the payee to be in a “fiduciary relationship” with the borrower the question is much simpler. The payee will be “someone with a role in the decision making process in relation to the transaction in question e.g. as agent, or otherwise someone who is in a position to influence or affect the decision taken by the principal” [51] (affirming the view of Christopher Clarke LJ in Novoship (UK) Ltd v Mikhaylyuk [2012] EWHC 3586 (Comm) at [108]).
The Court found that the emphasis on the duty to provide disinterested advice as the pre-condition to the application of the rules and remedies available in the case of bribes and secret commissions has been repeated in many cases since Panama and South Pacific Telegraph Company and v India Rubber, Gutta Percha, and Telegraph Works Company (1874-75) L.R. 10 Ch. App. 515 [62] (with one striking authority being Shipway v Broadwood [1899] 1 QB 369 [63]).
The straightforward and simple question to ask is “Did the ‘agent’ [the payee] owe a duty to be impartial and to give disinterested advice, information or recommendations” [102]. It is the duty to be honest and impartial that matters [92]. The precise scope of the payee’s duties will require examination by reference to the terms of engagement [47].
In recent authorities Courts have characterised the payee’s duty as a “fiduciary duty of loyalty”. While that may be accurate, it does not mean that the Courts need to involve themselves in complex analyses of the nature of a fiduciary relationship or the duties that may be associated with a fiduciary relationship. The Court found it would be better to avoid doing so [102].
Whether Broker Owed Requisite Duty On Facts
The Broker, on the basis of their terms and conditions, did owe the requisite duties on these facts to engage the law applicable to bribes and secret commissions. The Broker was under a duty to make a disinterested selection of mortgage product to put to its client in each case. To the extent that it was necessary, the Judges below were also correct to hold that the Broker owed a fiduciary duty of loyalty to Mrs Wood and Mr Pengelly [110].
Where the Broker only put forward a single product for the client’s consideration (the so called “information-only sale”), it was the Broker and not the client, who had access to a panel of lenders and the Broker undertook to work from that panel to provide the “appropriate” product to meet the client’s individual circumstances and needs. This necessarily involved judgment and choice on the part of the Broker. Moreover, under the terms and conditions the Broker had express authority to negotiate with lenders and could thereby seek to improve the terms available to the client [113].
The High Court authority of HHJ Raynor in Commercial First Business Ltd v Pickup and Vernon [2017] CTLC 1 (where the Court had dismissed the ‘half secret’ commission claim on the basis that no fiduciary duty was owed as there could be no expectation of “undivided loyalty” and the broker was a mere introducer) was wrongly decided [126]. On the broker’s terms and conditions there was clearly intended to be an exercise of judgment on the part of the broker as to what best fitted the borrower’s requirements, which was an exercise requiring an impartial and disinterested view (thereby being sufficient to impose a fiduciary duty on the broker) [125].
Half or Fully Secret?
The Broker’s terms and conditions were identical for Mrs Wood and Mr Pengelly. They notified Mrs Wood and Mr Pengelly that the Broker “may” receive fees from creditors with whom it placed mortgages. The terms went on to say:
“Before you take out a mortgage, we will tell you the amount of the fee in writing. If the fee is less than £250, we will confirm that we will receive up to this amount. If the fee is £250 or more, we will tell you the exact amount.”
The evidence of Mrs Wood and Mr Pengelly was that they did not receive any subsequent written notification of the fact or amount of the Broker’s commission. The Court found that the Broker’s failure to make any disclosure in accordance with the terms and conditions in these cases meant that Mrs Wood and Mr Pengelly were entitled to proceed on the basis that no commission was being paid [119]. Therefore on both cases this was a case of “fully secret” commission [134].
Rescission
Secret payments were treated as a special category of fraud with the principal being entitled to have the relevant contract rescinded as of right at his or her election [61]. Therefore. rescission of a transaction with the third party is available as of right in cases of bribes or secret commissions, subject to making counter-restitution [101].
Stuart Cutting
scutting@threesone.law
