FHR European Ventures LLP and others (Respondents) v Cedar Capital Partners LLC (Appellant) [2014] EWCA Civ 17.

The Supreme Court handed down its decision in FHR European Ventures LLP & Others v Cedar Capital Partners LLC on 16 July 2014. This is a key decision of great practical importance for fraud and insolvency practitioners. The case centres around the treatment of a claim against an agent who takes a bribe or secret commission. This area of law is very complex and the Supreme Court has now clarified the position, answering a question which been subject to academic controversy and conflicting judicial decisions over the past 200 years.

The rather complicated sounding question to be determined by the Court was “whether a bribe or secret commission received by an agent is held by the agent on trust for the principal, or whether the principal merely has a claim for equitable compensation in a sum equal to the value of the bribe or commission.”

In other words, the Court had to decide whether the bribe would be considered to be held by the agent on behalf the principal under what is a known as a “constructive trust” (this sort of a claim is known as a “proprietary claim”) or whether the principal would only be allowed to claim a sum of money in the amount of the bribe or commission received (known as a “personal claim”).

So what difference does it make? If the bribe or commission was considered to be a “proprietary claim” and the unauthorised benefit considered to be held on constructive trust then the claim would be treated as the property of the principal. Should the agent become insolvent, the principal’s claim would trump that of any unsecured creditors. It also means that the principal could trace and follow the claim. Tracing is a complicated area of law but at the risk of over-simplifying it, an example might be where a monetary bribe or commission is used to purchase something else, for example a painting, then the principal could “follow” the bribe and take title to the painting. This is of particular importance where the agent is insolvent as an award of damages is likely to be of little value to the principal.

However if the principal was only deemed to have a “personal claim” then they would only be entitled to compensation in the sum of the bribe or commission received. Should the agent become insolvent then the principal’s would rank equally as a creditor (known as “pari passu”) with other unsecured creditors and the principal would have no such right to trace or follow.

This decision will be welcomed by practitioners as it gives resolves a longstanding debate on the subject of the treatment of such claims. Notwithstanding the clarity it gives, the decision is likely to be seen as attractive from a policy point of view in light of the UK’s current concerns about bribery and corruption. As Lord Templeman said in the famous tracing case AG for Hong Kong v Reid [1994] 1AC 324, 330H “[b]ribery is an evil practice which threatens the foundations of any civilised society” and this decision shows that where possible the Court will interpret previous decisions alongside policy and practical considerations in order to ensure that bribery cases are dealt with in a stringent manner.