In an appeal against two High Court decisions, the Court of Appeal has found that a fiduciary relationship is not a necessary pre-condition to relief in respect of an undisclosed commission paid to an agent. Instead, the court should determine whether the agent was obliged to provide information, advice or recommendation on an impartial or disinterested basis, saying that “it is the duty to be honest and impartial that matters”. Where there is such a duty, both the payer and recipient of the undisclosed commission will be liable.

The Court of Appeal further held that each of the cases before it involved undisclosed commissions (which give rise to a right to rescind the contract), rather than “half-secret” commissions (where the principal was aware of the payment to its agent, but did not have sufficient information to give informed consent to that payment, with the result that rescission may, but will not necessarily, be available). In the two cases before the court a mortgage broker’s terms provided that they may take a commission from lenders, but that if they did so, it would be disclosed to the borrowers. The court held that in circumstances where no commission was disclosed, the borrowers were not on notice that commission was being paid, and the commissions were therefore secret commissions.

Frances Elizabeth Wood v Commercial First Business Limited [2021] EWCA Civ 471

This Court of Appeal judgment is a helpful clarification of the position in relation to secret commissions and indicates that the court will not be required to strain to find a fiduciary duty in order to grant relief in such cases. It further indicates that a general disclosure of potential commissions, of the kind provided to the borrowers in this case, may be insufficient to take cases out of the realm of secret commissions.

Heather Rankin, a senior associate in our disputes team, considers the decision further below

Background

Two unconnected borrowers sought rescission of their mortgages on the grounds that the mortgage lender had paid commissions to the borrowers’ broker without their knowledge or informed consent.

The first borrower, Mrs Wood, was partially successful in the High Court in obtaining compensation in the amount of the undisclosed commission paid to the broker and rescission of the mortgage agreement (subject to an obligation to pay restitution to the assignee of the mortgagor).

The second borrower, Mr Pengelly, succeeded before the High Court (in an appeal in possession proceedings) in arguing that his mortgage should be rescinded (again, subject to his obligation to make restitution).

The High Court had held in both cases that a fiduciary relationship had existed between the broker and their client (Mrs Wood and Mr Pengelly respectively). However, in Mrs Wood’s case, the High Court had determined that a fiduciary relationship was not required in order for her to obtain rescission. By contrast, the High Court had held in Mr Pengelly’s case that a fiduciary relationship was a necessary pre-condition to such relief.

The lender appealed against both decisions and the appeals were heard together.

Decision

Three issues fell to be determined in the appeal:

  1. Whether a fiduciary relationship is a necessary pre-condition to relief against the payer of undisclosed commission.
  2. Whether the broker in question had owed fiduciary duties to Mrs Wood and Mr Pengelly.
  3. Whether the payments made in these cases were “half-secret” or entirely secret commissions.

Is a fiduciary relationship a pre-condition for relief in respect of an undisclosed commission?

David Richard LJ (with whom the other judges agreed) conducted a detailed review of the case law in relation to secret commissions, including the judgment of Christopher Clarke LJ in Novoship (UK) Limited v Mikhaylyuk [2012] EWHC 3586 (Comm), in which the liability of a payer of secret commission was framed as being accessory to the liability of the agent for breach of fiduciary duty. The judge noted however that the need for a fiduciary relationship was not referred to in most of the leading cases.

The judge also considered that, if a fiduciary relationship was required for liability to arise, there were risks that either relief would be inappropriately denied, or that the term “fiduciary relationship” would be applied so widely as to refer simply to the proposition that a person under a duty to another must not accept an inducement to influence them in the performance of that duty.

As a result, the court found that a fiduciary relationship is not required in order for relief to be granted in respect of a secret commission. Instead, the court should determine whether the agent was under a duty to provide information, advice or recommendation on an impartial or disinterested basis. If the agent is under such a duty, and receives a bribe or secret commission, both the agent and the payer will be exposed to the applicable civil remedies.

The duties owed to Mrs Wood and Mr Pengelly

The Court of Appeal held that the agent unquestionably owed both borrowers a duty to make a disinterested selection of mortgage products to put to its clients. Although (based on the other findings in the judgment) it was not necessary, the Court of Appeal also considered that the broker owed the borrowers fiduciary duties.

Were the payments “half-secret” commissions

In “half-secret” commission cases, a borrower is not entitled to rescind the contract in question but instead, if the agent is held to have breached a fiduciary duty to their principal, the court will have a discretion to award the most appropriate remedy in the circumstances (which might, but will not necessarily, be rescission).

In both cases the broker’s terms and conditions provided that “We may receive fees from lenders with whom we place mortgages. Before we take out a mortgage, we will tell you the amount of the fee in writing.” The Court of Appeal held that these terms meant that the borrowers were entitled to assume that, because the broker had not disclosed any fees, they had not been paid. As a result, the fees received by the agent were a secret (not half-secret) commission.

Heather Rankin
Heather Rankin
Senior Associate, London