The Court of Appeal has found that there was no breach of fiduciary duty where an introducing broker failed to inform its client investors of the amount of commission it received from the financial institution to which it had introduced them: Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd  EWCA Civ 83.
This decision represents a novel application of the law in this area and it offers helpful guidance as to the scope of the fiduciary duty that may be owed by an agent to its principal to disclose commission payments. The Court of Appeal confirmed the following general principles of broader application:
- A principal’s knowledge of its agent’s remuneration may limit the scope of the fiduciary duty that the agent owes to its principal to disclose that remuneration.
- Generally speaking, where a principal knows that its agent is being paid by another party, it cannot complain that it did not know the precise particulars of the amount paid.
- However, where there is no trade or customary usage, the principal’s knowledge of the commission may need to be “more specific“. Considering the specificity of knowledge required by a principal, the Court of Appeal noted two factors relevant in the present case:
- Sophistication of the principal – in this case the investors were wealthy and experienced investors.
- Degree of secrecy – the commission was less “secretive” because the investors knew that all the commission payable to the broker was payable bythe financial institution (the investors did not pay any commission to the broker themselves, they only paid commission to the financial institution).
In the present case, the Court of Appeal concluded that there was no duty on the broker to disclose to the investors the actual amount of the commission it received from the financial institution. The broker’s failure to disclose the amount of commission it received did not, therefore, represent a breach of the broker’s fiduciary duty.
Collins Stewart (now called Cannacord Genuity, the defendant) is an investment firm. It entered into an introducing agreement with a broker, Medsted (the claimant), under which Medsted would introduce investors to Collins Stewart. The agreement provided that Medsted would be paid a proportion of the commission received by Collins Stewart from introduced investors. The agreement contained a non-circumvention term prohibiting Collins Stewart from dealing with introduced investors directly (this was a point of dispute between the parties, but confirmed by the High Court, see below).
Medsted successfully introduced 16 investor clients who traded through Collins Stewart. Subsequently however, Collins Stewart did business with some of them directly, cutting Medsted out of its share of the commission.
High Court Decision
The High Court found that Collins Stewart was in breach of its obligation not to circumvent Medsted by dealing directly with investors introduced by it, and Medsted had suffered loss by missing out on the payments to which it was entitled. However, the High Court awarded nominal damages, because it found that Medsted owed fiduciary duties to the introduced investors, which it had breached by failing to tell the investors of the precise split of commission as between Collins Stewart and Medsted. In this context a key finding of fact by the High Court was that the investors did not pay a commission to Medsted and so must have assumed that Medsted was receiving payment from Collins Stewart, to which the investors did pay commission (this point was not appealed).
Notwithstanding the above finding of fact, the High Court described the payments from Collins Stewart to Medsted as a “secret commission” and denied any substantive recovery on public policy grounds, because otherwise the court would be assisting Medsted to profit from its own breach of fiduciary duty. Medsted appealed.
Court of Appeal Decision
The Court of Appeal upheld Medsted’s appeal, finding that it had not acted in breach of the fiduciary duty it owed to the introduced investors by failing to inform them of the amount of commission it received. In particular, it looked at whether it was within the scope of Medsted’s duty to the investors to inform them how the commission was to be divided between itself and Collins Stewart.
The Court of Appeal in this case considered authority of the same court in Hurstanger Ltd v Wilson  1 WLR 2351. In Hurstanger, additional commission was paid by a lender to a broker, over and above what had been expressly agreed between the lender and borrower, but a pre-contractual document stated that “in some circumstances this company [a lender] does pay commission to brokers“. The borrower alleged that the additional commission paid to its broker amounted to a “secret commission“. The Court of Appeal in Hurstanger made the following observations/findings:
- It noted the serious consequences of finding that a secret commission has been paid which, in addition to amounting to a breach of fiduciary duty, is a category of fraud.
- It questioned whether there was a “half-way house” between the situation where there has been sufficient disclosure to negate secrecy, but nevertheless the principal’s informed consent has not been obtained – because a finding of fraud would be unfair where there has been only partial or inadequate disclosure.
- The Court of Appeal ruled that it was a “half-way house” case: the pre-contractual document was sufficient to negate secrecy, but insufficient to obtain the borrowers’ informed consent, because – among other things – the lender should have informed the borrower of the amount of the commission. It found that this amounted to a breach of fiduciary duty by the broker, but not the payment of a secret commission.
Applying Hurstanger to the present case, the Court of Appeal held that the investors’ knowledge of Medsted’s remuneration by Collins Stewart, meant that the scope of Medsted’s fiduciary duty to the investors was limited.
Referring to Bowstead & Reynolds on Agency (21st edition; 2018), the court said that where a principal knows that its agent is being paid by the opposite party, it cannot complain that it did not know the precise particulars of the amount paid. Where there is no trade or customary usage, the principal’s knowledge of the commission may need to be “more specific“. Considering the specificity of knowledge required by the investors in the current case, the Court of Appeal noted two principal distinctions with Hurstanger.
- Sophistication of the principal – The court noted that an important factor in Hurstanger was the unsophisticated nature of the borrowers, whereas the investors in the present case were wealthy and experienced investors.
- Degree of secrecy – Moreover, the commission was less “secretive” than in Hurstanger because the investors knew that all the commission was payable by Collins Stewart; there was no question that any extra commission was being paid over and above what had been agreed.
The court concluded that there was no duty on Medsted to disclose to the investors the actual amount of the commission it received from Collins Stewart. Medsted’s failure to disclose the amount of commission it received did not, therefore, represent a breach of the broker’s fiduciary duty (unlike in Hurstanger, in which the Court of Appeal held that the fiduciary duty had been breached, although the payments in question did not amount to secret commissions).
The Court of Appeal therefore allowed the appeal.