Fiduciary Relationships and the Granting of Relief of Undisclosed Commissions
Syedur Rahman of Rahman Ravelli details a judgement that considered whether a fiduciary relationship is necessary for relief to be granted.
The Court of Appeal heard conjoined appeals regarding whether a fiduciary relationship between a client and a broker was a necessary pre-condition for relief for the client of undisclosed commissions to the broker. The appeal was denied, and the judges held that a fiduciary relationship between a client and a broker was not a necessary pre-condition for remedies for an undisclosed commission.
In both Wood v Commercial First Business Ltd and Business Mortgage Finance 5 Plc v Pengelly, the lender and the broker were the same. Mrs Wood and Mr Pengelly (the borrowers) entered into separate mortgage agreements. Both borrowers defaulted on the loans, and each borrower sought rescission of both the loan agreements and the mortgages, on the basis that the lender had paid commissions to the broker without the knowledge or consent of the borrowers. The lender went into liquidation in 2019, and the outstanding loans were assigned to the appellants.
Mrs Wood issued proceedings to set aside the loan agreements and mortgages after enforcement proceedings had been commenced and possession orders had been made. The High Court found in her favour as regards the undisclosed commissions but rejected her other grounds. The lender was ordered to pay £92,927 (the aggregate of the undisclosed commissions paid by the lender to the broker), and rescinded the relevant mortgage agreements and deeds on the condition that she gave restitution to the relevant appellant in an amount to be determined by accounts order by the judge.
Mr Pengelly’s claim was dismissed in its entirety at the County Court and permitted the appellant to enforce a possession order which had previously been made. On appeal to the High Court, Mr Pengelly’s appeal was allowed relating to a claim for rescission based on the payment of an undisclosed commission from the lender to the broker.
There were three issues that the Court of Appeal had to decide:
- Is a fiduciary relationship between the client and the broker a necessary pre-condition to the grant of relief against the payer of the undisclosed commission?
The Court held that “the risk inherent in requiring "a fiduciary relationship" as a pre-condition for remedies in respect of bribes or secret commissions 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 beyond the simple proposition that a person under a duty to another must not accept or be offered an inducement to influence them in the performance of that duty.
“The present cases do not involve relationships, such as trustee and beneficiary or director and company, which without more clearly qualify as fiduciary. They fall within a broad and common set of relationships which involve a contractual or other legal duty to provide information or advice or recommendations. The precise scope of the duties of the brokers in the present cases, as in all cases, will require examination by reference to the terms of their engagement.
“While it may sometimes be appropriate to describe a duty to give disinterested advice or information as "fiduciary", it is not necessary to do so. It is the content of the duty, not the label attached to it, that matters.”
- Did a fiduciary relationship exist between the client and the broker in these cases?
The judge found that the previous judges were right to hold that, “on the basis of the broker's terms and conditions and on the basis of the findings of fact at first instance, the broker owed duties which engaged the law applicable to bribes and secret commissions. It 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 is necessary, they were also correct to hold that the broker owed a fiduciary duty of loyalty to Mrs Wood and Mr Pengelly in the performance of its duties. As I have indicated in relation to the first issue, it matters not whether that duty is characterised as "fiduciary", either in a loose sense or at all”.
- Are the commissions that were paid properly categorised as half-secret commissions?
The appellants contended that the commissions paid by the lender to the broker were properly categorised as half-secret commissions. This is because the borrowers knew, or would have known, if they had read the terms of business, that the broker might be paid fees by lenders. The judge held that, “The difficulty for the appellants lies in the remaining sentences of the provision in the broker's terms of business. They imposed an unqualified obligation on the broker to inform the borrower, before a mortgage was taken out, of the amount of the fee. As each of the commissions in both cases exceeded £250, the exact amount had to be disclosed. Without such disclosure, the borrowers were not on notice that any commission might be paid. On the contrary, the only conclusion from the absence of any notification as required was that no commission was to be paid. The undisclosed commissions were therefore secret, not half-secret, commissions”.
Rescission of a transaction with a third party is available in cases of undisclosed commissions, subject to making counter-restitution. Secret payments (undisclosed commissions) were “treated as a special category of fraud with the principal being entitled to have the relevant contract rescinded as his or her election.”