The rules around commissions have got tougher

Despite the law having been long established, the courts of England and Wales are seeing an increasing number of high-profile cases involving failures to adequately disclose commission payments.  

There is likely to be a further increase in these cases, following a recent Court of Appeal decision that has meant that both payers and receivers of commission are finding that their business practices are under scrutiny, with serious vulnerabilities being exposed by customers who are claiming relief arising from the conduct of unscrupulous parties and innocent businesses who have failed to ensure their business practices reflect the current legal landscape.  

Secret commissions

When an agent, broker or introducer agrees to act for a customer, the law often imposes an obligation of trust and confidence, which is known in law as a fiduciary relationship. Such a relationship also imposes various additional duties, including a duty not to make a profit out of the customer’s trust, without their informed consent.

Consequently, if an agent, broker or introducer receives an undisclosed commission from a third party, the law is likely to assume that there has been a breach of their fiduciary duties. In such circumstances, both the payer of the commission and the recipient could be found liable to the customer whose remedies might include termination of the agency contract, recovery of compensation from the agent and in certain circumstances termination of the contract with the payer of the commission.

Until recently there has been uncertainty as to the extent to which law relating to secret commission applies to relationships that cannot be described as fiduciary. That uncertainty has now been clarified.  

What’s new?

In April this year, the Court of Appeal issued its judgment in the case of Wood v Commercial First Business Ltd & Ors (2021). In this case, the court was asked to consider two conflicting High Court rulings on the question of whether a borrower is permitted to cancel a loan agreement where their broker had received an undisclosed commission from the lender. In both cases, the broker’s contract had stated that commission might be payable and that they would inform the borrower of the level of commission if it exceeded £250.

The Court of Appeal’s decision provided, among other things, clarity on two key issues in the law of bribery and commissions:

• The meaning of a 'bribe' extends beyond the notion of a corrupt payment and includes any undisclosed payment or gift made in order to induce an agent.
• A customer does not have to establish that there was a fiduciary relationship with their agent/broker/introducer in order to bring a claim. They just need to show that the agent/broker/introducer owed a duty to be impartial and to give disinterested advice, information or recommendations.

Comment

The Court of Appeal decision provides welcome clarity on the law of secret commissions, particularly in relation to the requirement for a fiduciary relationship between the agent/broker/introducer and their client. It also appears to have widened the scope of those who are likely to be subject to a claim. 

In light of this, payers and recipients of commissions will need to review their business practices, so as to future-proof against claims. In particular, recipients of commission should:

• Review their standard terms and processes, so as to ensure that the level of commission they are likely to receive is clearly and fully disclosed to their customer.
• Keep a detailed record and evidence of when and how the level of commission was communicated to the customer, in case it is required to respond to a claim.
• If the level of commission is not known from the outset, inform customers that commission will be paid and ensure that they are informed of the specific level of commission as soon as it is known.

Payers of commission will need to review the agent’s contract with their customer, so as to ensure that they are being open and transparent about any commission received.

Jonathan Cole is a commercial litigation partner in the dispute resolution team at Goodman Derrick