Commercial fraud: Bribery
The civil wrong of bribery is concerned with payments made to agents without their principals’ knowledge or consent.
This timeshare advice relates particularly to Committees and considers the elements of the cause of action of bribery, the implications of a payment being classified as a bribe, the relevance of fiduciary duties, defences and remedies. It also considers the situation where an agent is the person giving the bribe. It is part of a series of practice notes examining different aspects of commercial fraud.
Defining bribery in civil law
“Bribery is an evil practice which threatens the foundations of any civilised society.”
(Lord Templeman, A-G for Hong Kong v Reid [1994] 1 AC 324 at 330H).
The common law has long recognised criminal offences of, and related to, bribery and, on 1 July 2011, the Bribery Act came into force (see Bribery Act 2010: Toolkit (www.practicallaw.com/9-503-9451)).
The authorities contain various definitions of the civil wrong of bribery. A succinct definition is as follows:
“Bribery is committed where one person makes, or agrees to make, a payment to the agent of another person with whom he is dealing without the knowledge and consent of the agent’s principal”.
(Briggs J, Ross River Ltd v Cambridge City FC [2008] 1 All ER 1004 at para 203.)
In Petrotrade Inc v Smith [2000] 1 Lloyd’s Rep 486 Steel J gave the following definition of a bribe under the civil law:
“For the purposes of the civil law a bribe means the payment of a secret commission, which only means: (i) that the person making the payment makes it to the agent of the other person with whom he is dealing; (ii) that he makes it to that person knowing that that person is acting as the agent of the other person with whom he is dealing; and (iii) that he fails to disclose to the other person with whom he is dealing that he has made that payment to the person whom he knows to be the other person’s agent.”
(see also Fiona Trust & Holding Corporation v Yuri Privalov [2010] EWHC 3199 (Comm), per Andrew Smith J at [70] and Novoship (UK) Ltd and others v Mikhaylyuk and others [2012] EWHC 3586 (Comm), per Christopher Clarke J at [104].)
It follows that the essential elements of the civil wrong of bribery are as follows:
A payment made (or benefit provided) to the agent by the person dealing with the principal.
Knowledge by the payer of the agency relationship.
Secrecy of the fact of the payment to the agent.
Before considering each of these elements in turn, it is worth briefly considering the significance of a payment being classified as a bribe.
Consequences of the classification of a payment as a bribe
A claimant seeking a remedy in circumstances in which a bribe is alleged to have been paid may, on the particular facts, have available to him other potential causes of action, such as breach of fiduciary duty. However, the classification of a payment as a bribe is important because there are various principles which apply once a payment has been classified as a bribe which potentially assist a claimant. In particular, where a payment has been classified as a bribe:
There is an irrebuttable presumption that the agent was influenced by the bribe (Shipway v Broadwood [1899] 1 QB 369).
The court will not investigate the briber’s motive (Anangel v IHI [1990] 1 Lloyd’s Rep 167 at p 170).
It is immaterial whether the parties thought that they were doing anything wrong (Shipway v Broadwood [1899] 1 QB 369).
It is not necessary to show that the principal in fact suffered any loss as a result of the bribe (Parker v McKenna (1874) 10 Ch App 96).
An agent who has been paid a bribe is not entitled to receive his agent’s commission or fee (see Rhodes v Macalister (1923) 29 Com Cas 19 and FHR European Ventures LLP and others v Mankarious and others [2011] EWHC 2308 (Ch), per Simon J at [85], [103] and [111), and it is highly unlikely that such an agent could recover any allowance for his skill and labour (such as that recovered in the case of Boardman v Phipps [1967] 2 AC 46).
The remedies available in cases of bribery are also potentially broader than those available in respect of secret profits made by a fiduciary.
Elements of bribery
The elements of the cause of action of bribery are considered below.
Agency relationship
It is clear from the authorities that the civil wrong of bribery necessarily occurs in the context of an agency relationship (see, for example, the statements of principle by Briggs J in Ross River and Steel J in Petrotrade cited above).
Benefit to the recipient
The benefit need not necessarily be monetary. For example, in Amalgamated Industries Ltd v Johnson & Firth Brown Ltd (Unreported) 3 April 1981 Ch D, it was held that a job offer could, at least potentially, amount to a bribe. There would appear to be no reason in principle why the relevant benefit should be limited to any particular form, so long as it constitutes a material benefit to the agent concerned. This could arguably take the form of an indirect benefit such as a job offer to a member of an agent’s family.
Secrecy
The secrecy element is essential in establishing a bribe:
“The essential vice inherent in bribery is that it deprives the principal, without his knowledge or informed consent, of the disinterested advice which he is entitled to expect from his agent, free from the potentially corrupting influence of an interest of his own.”
(Ross River, at para 204.)
An example of a case in which the court accepted that a bribe had been paid is Constantin Medien AG v Ecclestone and others [2014] EWHC 387 (Ch). In that case, the party who had accepted the £44 million bribe (G) worked at a bank which held a substantial number of shares in the Formula One group of companies. The party who paid the bribe (E) had done so so that G would facilitate the sale of the Formula One shares held by the bank to a purchaser of whom E approved. It is worth noting that E accepted he had paid G the sum but asserted that he had done so because G had been blackmailing him. The judge rejected that argument. He held that bribery was more probable than blackmail. Further, he accepted G’s version of events as “broadly accurate, while the defendants’ evidence contained inconsistencies and was “otherwise unsatisfactory”. (see Legal update, Applicable law where events relevant to conspiracy occurred in Germany and England (High Court) (www.practicallaw.com/6-559-1805).)
The effect of partial disclosure
Circumstances may, however, arise in which the principal has some knowledge (or is in some way put on notice), of matters relating to the alleged bribe but nevertheless complains that he had insufficient knowledge to have given proper consent.
In Hurstanger v Wilson [2007] 1 WLR 2351, the Court of Appeal held that there was a distinction to be drawn between cases of no disclosure and cases of partial or inadequate disclosure. While the former cases would continue to be classified as bribery cases, a partial disclosure which was “sufficient to negate secrecy” could remove an act from the realms of bribery. The same act would, however, still potentially constitute a breach of fiduciary duty. (See Legal update, Secret commissions and the “half way house” (www.practicallaw.com/7-366-2965).)
In relation to the question of the proper attribution of knowledge passed to individuals, see Defence of disclosure and consent.
Briber’s knowledge
To establish a bribe, the claimant must show that the briber knew that the payee was acting as an agent: see sub-paragraph (ii) of the definition from the Petrotrade case set out above.
In Logicrose Ltd v Southend United FC [1988] 1 WLR 1256, the court considered the degree of knowledge which the briber must possess of the existence of the agent’s personal interest and accepted a submission that: “nothing less than actual knowledge or wilful blindness will suffice. In particular, constructive knowledge will not do. Parties to negotiations do not owe each other a duty to act reasonably, but only to act honestly”.
Briber accepts the risk that the agent may not disclose
In Logicrose the court recognised that (relying upon dicta of the Court of Appeal in Grant v Gold Exploration & Development Syndicate Ltd [1909] 1 QB 233) that a briber cannot seek to defend himself by saying that he believed the agent would disclose the transaction to his principal – the briber therefore accepts the risk that the agent will not make disclosure. Equally, the converse will apply – if a man deals secretly with another’s agent behind the back of his principal, knowing that the agent intends to conceal the dealing from his principal and that he may be intending to obtain some private advantage for himself, then he takes the risk that the agent does in fact intend to do so.
Timing of knowledge
A payment, or agreement to pay, made innocently (for example because the payer is not aware that the recipient is the agent of the third party) will become a bribe if the payer becomes aware of the connection and continues with the transaction (Grant v Gold Exploration & Development Syndicate [1900] 1 QB 233).
Some further issues to consider
Some further issues to consider include:
Is a corrupt purpose a necessary element of the cause of action?
Is a conflict of interest a necessary element of the cause of action?
Is a secret profit necessarily a bribe?
Must the recipient be a fiduciary?
The position of a principal of a bribing agent.
Is a corrupt purpose a necessary element of the cause of action?
Some decided cases on bribery refer to an intention to induce the recipient to breach his duties towards his principal. In Hovenden & Sons v Millhoff (1900) 83 LT 41, Romer LJ’s description of what constituted a bribe included the phrase “with a view to inducing an agent”, thereby suggesting a requirement to show a corrupt purpose. However, he then set out certain rules which would apply “if a bribe be once established”, the first of such rules being that evidence of motive would not be admissible.
However the balance of subsequent authority favours the view that, where the secrecy of the transaction is made out, a presumption of a corrupt purpose will follow (see Industries & General Mortgage Co v Lewis [1949] 2 All ER 573, Re a Debtor [1927] 2 Ch 376, Tesco Stores v Pook [2004] IRLR 618 at [42], Fiona Trust at [72], Novoship at [106]).
Is a conflict of interest a necessary element of the cause of action?
It is worth noting that in Anangel v IHI [1990] 1 Lloyd’s Rep 167, Leggatt J accepted the proposition that “the key to determining whether or not a payment or other inducement constitutes a bribe as being whether or not the making of it gives rise to a conflict of interest”. However it is unlikely that this adds anything to the requirements as discussed above, as a conflict of interest will always be likely to arise where an agent receives secret payments from the counter-party to a transaction.
Is a secret profit necessarily a bribe?
Not all secret profits will be bribes. In the Reid case the Privy Council commented that secret benefits (defined as a benefit derived by a fiduciary from trust property or from knowledge acquired in the course of acting as a fiduciary) “may or may not” also be bribes.
Note, however, that the specific rules which the courts will apply in relation to bribes – principally an irrebuttable presumption that the receiving agent is influenced by the bribe, and also a rule against any enquiry into the motive of the bribe payer, will not apply in relation to a ‘mere’ secret profit (probably a more commonly-used term for the “secret benefit” discussed in Reid) not amounting to a bribe.
Must the recipient be a fiduciary?
In most cases the recipient of the alleged bribe will clearly be a/of the innocent party. However what about the case in which a ‘bribe’ is paid to a person who does not appear to owe fiduciary duties?
This was considered in Reading v Attorney General by Denning J at first instance [1948] 2 K.B 268, then by the Court of Appeal ([1949] 2 K.B 232]) and finally by the House of Lords ([1951] AC 507).
Reading was an army sergeant who had been paid £20,000 to transport illicit spirits and drugs. Although he had driven a civilian lorry, he had worn his army uniform for the purpose of diverting attention from his illegal activities. Having been convicted in criminal proceedings, he sought in civil proceedings to recover the payments he had received which were held by the Crown. The Crown defended the action by arguing that when an employee receives bribes he is accountable to his employer for any money which he has received.
Perhaps unsurprisingly, Reading lost on each occasion. In his judgment, Denning J stated that the existence of fiduciary duties was not an essential ingredient of bribery.
The Court of Appeal subsequently found that a fiduciary relationship did have to be shown. They were, however, content that the term should be applied in a “loose” or “comprehensive” sense, and, in particular, that it would arise where the defendant was entrusted with property to be used for the benefit of the claimant and not for purposes not authorised by him (such as Reading’s uniform in this case), and also where the defendant was entrusted with a particular job to perform for the claimant, the example being given of the negotiation of a contract on the claimant’s behalf.
The House of Lords endorsed the conclusions of the Court of Appeal.
However at the very end of the Court of Appeal judgment in Reading there is a note of caution adding that:
“……we do not wish to be taken as holding that if the fiduciary relation were absent the appeal would necessarily succeed.”
This would appear to leave open the possibility of a successful claim against the recipient of a bribe who is not on any view a fiduciary.
In the first instance judgment in Reading, Denning J made certain comments suggesting that Reading’s actions might have been a breach of the implied contractual duty of fidelity he owed as an employee of the Crown. It follows that where the recipient of a bribe is an employee, but not a fiduciary, it may well be possible for the employer to bring a breach of contract claim, although the remedies would be more limited than those in circumstances where fiduciary obligations are owed (see Remedies).
Nottingham University v Fishel [2000] ICR 1462 concerned the question of when fiduciary duties may arise in an employment relationship. Elias J (at page 1490) gave various examples of circumstances which might place an employee in the position of a fiduciary, for instance the receipt by an employee of confidential information, or the receipt by an employee of a bribe for which the employee would be obliged to account to his employer (the relevant passage from Fishel was cited with apparent approval in TCP Europe Ltd v Perry [2012] EWHC 1940 (QB) at [65].
The position of a principal of a bribing agent
In E Hannibal & Co Ltd v Frost [1988] 4 BCC 3 a company successfully sued one of its directors for the recovery of company money expended on bribes. The court held that the giving of bribes was outwith the authority of a director, even if they were paid with a view to getting work for the company, unless and until the director was authorised by the shareholders.
However, in Hamlyn v John Houston & Co [1903] 1 KB 81, it was held that a partner who paid a bribe while acting as agent for the partnership was acting within the scope of his agency, and so the partnership was vicariously liable for his conduct (see also Pintorex Ltd v Keyvanfar and others [2013] EWPCC 36 at [47]).
Further, in Armagas Ltd v Mundogas SA [1986] 1 AC 717, Robert Goff LJ concluded that rescission of a contract was available to the innocent third party where the agent of the counter-party had procured the contract through the use of a bribe.
In summary, therefore, although a principal whose agent has resorted to bribery may be entitled to recover money which has been expended on the bribe, he may also be liable to pay damages to the counter-party and may find that the counter-party is entitled to rescind the contract they have entered into.
Defences to a bribery action
Defence of disclosure and consent
Disclosure of the proposed arrangement is the only substantive defence which can be advanced in respect of a payment which would otherwise constitute a bribe:
“The remedy is a very simple one and it is well within the compass of any ordinary business man. The complete remedy is disclosure, and if an agent wishes to receive any kind of remuneration from the other side and wishes to test whether it is honest or not, he simply has to disclose the matter and rest upon the consequences of that”
(Atkin J, Rhodes v Macalistair (1923) 29 Com Cas 19 , pp 29-30).
Often, the outcome of a dispute over whether there has been adequate disclosure will turn on whether knowledge imparted to individuals can be attributed to related corporate entities. It follows that the rules in Meridian Global Funds Management v Securities Commission [1995] 2 AC 500 (cited with approval in Sudarshan Chemical Industries v Clariant Produckte (Deutschland) [2013] EWCA Civ 919 at [130]) as to when knowledge of an individual can be attributed to a company will often be determinative of the question of whether a corporate principal is sufficiently aware of a bribe for a defence of disclosure to succeed. (See Legal update, Attributing knowledge to a company (www.practicallaw.com/2-100-0215).)
The decisions in this area as to what constitutes adequate disclosure are particularly fact-sensitive. See, for example:
In Jafari-Fini v Skillglass Ltd and others [2007] [ EWCA Civ 261, it was held that disclosure of a bribe to one director of a company amounted to disclosure to the company itself. The Court of Appeal judgment stated that “information relevant to [a] company’s affairs that comes into the possession of one director, however that may occur, can properly be regarded as information in the possession of the company itself” (paragraph 98).
Jafari-Fini was distinguished in Ross River in which Briggs J stated that “a payment by a person dealing with a company to a managing director of the company charged with the negotiation on the company’s behalf is only disclosed to the company by the director if that disclosure is made to all its directors or to a properly convened board meeting attended by a sufficient quorum.”
For the effect of partial or incomplete disclosure, see The effect of partial disclosure.
Defences of de minimis or intention to repay?
In The Governor and Company of the Bank of Ireland and another v Jaffery and another [2012] EWHC 1377 (Ch), Vos J considered a number of claims including claims for fraud, bribery, and dishonest assistance in a breach of fiduciary duty. With regard to the bribery claim, he set out the criteria as summarised in Fiona Trust & Holding Corporation v Yuri Privalov [2010] EWHC 3199 (Comm). In respect of one of the bribery allegations he held that, although the criteria were satisfied, the relevant payment was not a bribe because the intention had been for it to be repaid immediately, although it had not actually been repaid, due to an oversight. Had it been immediately repaid as intended, it would not have been of significant value, and would not have constituted a bribe (paragraph 390, judgment and see Legal update, Consequences of breach of fiduciary duty (High Court) (www.practicallaw.com/6-519-7687)). This reasoning seems questionable and appears to be unsupported by other authorities.
No defence of contributory negligence
There is no defence of contributory negligence (or any equitable equivalent) available in a bribery action (Corporacion Nacional del Cobre de Chile v Sogemin Metals Ltd [1997] 2 All ER 917).
Remedies
It is useful to consider remedies as follows:
Remedies against the recipient.
Remedies against the briber.
Remedies against the recipient
The remedies which may be available against the recipient of a bribe are as follows:
A requirement to account in equity for the payment: Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347.
A restitutionary action for money had and received. This was considered by the House of Lords in Reading.
An action in damages for fraud – there may be a possible action in damages against the recipient of a bribe, if the party entering into the transaction in respect of which the bribe was paid has suffered loss as a result of the bribe. The amount of the bribe itself is presumed to represent the loss to the bribed party, and there is a requirement to prove loss in excess of the amount of the bribe itself. Bribery cases have traditionally been analysed in this way, although it is not a comfortable ‘fit’, as the tort of deceit requires a representation made to the wronged party which will rarely be present in cases of bribery. It has been suggested that it is better to consider bribery as a “hybrid form of wrong”, which gives rise to a distinct tort (see Mahesan v Malaysia Housing Society [1979] AC 374 and see Clerk and Lindsell on Tort (20th ed.) at 18-55).
Remedies against the briber
Rescission – The principal is entitled to rescind the contract entered into as a result of the bribe, and when making resitutio in integrem there is no need to give credit for the amount of the bribe, even if this is recovered from the recipient (see Logicrose v Southend United Football Club Ltd [1988] 1WLR 1256). As discussed above (The position of a principal of a bribing agent), rescission may be available against a principal whose agent has resorted to bribery.
Account of profits or equitable compensation – A briber may be liable in equity for dishonest assistance in breach of fiduciary duty, leading to either an account of profits (in an appropriate case) or equitable compensation.
Money had and received – Perhaps counter-intuitively (given that the briber has paid money rather than received money), an action for money had and received lies against a briber for the amount of the bribe (Mahesan v Malaysia Housing Society [1979] AC 374 ).
An action for damages for fraud – The amount of the bribe is presumed to represent the loss to the bribed party (Hovenden v Millhoff). There is a requirement to prove loss in excess of the amount of the bribe itself, but where such losses are proved they will be recoverable.
Absence of ‘rights’ of agent receiving bribe
An agent who has received a bribe disentitles himself to the commission which he would otherwise have been entitled to receive: Rhodes v Macalister (1923) 29 Com Cas 19. It is highly probable that any claim for any quantum meruit or Boardman v Phipps [1967] 2 AC 46 – type allowance for skill and labour would also fail.
In the Court of Appeal Lord Denning MR had stated in Phipps v Boardman [1965] Ch 992 at p 1021 that ‘If the agent has been guilty of any dishonesty or bad dealing, or surreptitious dealing, he might not be allowed any remuneration or reward’.
See also Imageview Management Ltd v Jack [2009] EWCA Civ 63. In that case, which involved a secret profit, it was held that the claimant would forfeit its right to a commission as a result of its breach of fiduciary duty. The court noted that, if an agent in the course of his employment is proved guilty of a breach of fiduciary duty, in practically every case he will forfeit any right to remuneration at all, although there may be breaches of duty which do not go to the whole contract, and which would not prevent the agent from recovering his remuneration. See also, FHR European Ventures LLP v Mankarious [2011] EWHC 2308 (Ch) at [85] – [94].
The Governor and Company of the Bank of Ireland and another v Jaffery and another [2012] EWHC 1377 (Ch) is an example of a case in which the secret profit did not taint the whole contract (see Legal update, Consequences of breach of fiduciary duty (High Court) (www.practicallaw.com/6-519-7687)).
Election
It is open to the wronged party to pursue alternative causes of action, electing between them at any time up to the point immediately prior to judgment being entered. See, for example, Petrotrade v Smith where the claimants had to elect between seeking judgment on their claim in tort or their claim for money had and received.
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