Daraydan Holdings Ltd & Ors v Solland International Ltd & Ors

A fiduciary must account to the principal for a bribe or secret commission received through the fiduciary position. The bribe and its traceable proceeds may be held on constructive trust for the principal, consistently with AG for Hong Kong v Reid [1994] 1 AC 324.

A proprietary remedy is available in any event where the contract price was actually increased to fund the commission and the commission was paid from the principal’s money. It is also justified where a fiduciary participated in a fraudulent representation that the inflated invoice price was the true price. Liability does not depend on proof that the payer acted corruptly, that the bribe affected the agent, or that the principal suffered loss.

The fifth defendant worked for and represented the third claimant in dealings concerning refurbishment contracts made by the claimants. He procured secret payments totalling about £1.8 million from the contractors and their companies. The payments represented 10% of receipts under the contracts and were built into the prices charged to the claimants.

The claims against the contractors and their controllers were settled during the trial. The court therefore determined whether the fifth defendant owed fiduciary duties, whether the claims had been compromised or were governed by Qatari law, and whether the commissions and their proceeds were held on constructive trust. The remedial issue required the court to address Lister & Co v Stubbs (1890) 45 Ch D 1 and AG for Hong Kong v Reid [1994] 1 AC 324.

1. Judgment was given for the claimants against the fifth defendant, including the proprietary remedy sought. He was a fiduciary who had extracted substantial secret payments in return for his influence in obtaining and performing the contracts.

2. A fiduciary is a person who undertakes to act for another in circumstances of trust and confidence. The defining obligation is loyalty. The fiduciary must act in good faith, avoid conflicts between duty and interest, refrain from unauthorised profits, and avoid acting for personal or third-party benefit without informed consent. An agent entrusted to negotiate or administer transactions must seek the best available terms for the principal. A sub-agent owes the same duty concerning bribes despite the absence of contractual privity.

3. The fifth defendant negotiated or approved contracts, invoices, additional work and payment schedules. He was employed by the third claimant and also owed duties to the corporate claimants, directly or as a sub-agent. The payments were concealed from every claimant.

4. The alleged release, forbearance and estoppel were not proved. English law governed most of the relevant employment and agency duties. No expert evidence established the asserted rule of Qatari law. The available evidence indicated that Qatari law also required confidentiality, trust and honesty and treated fraudulent secret commissions as criminal.

5. Consistently with AG for Hong Kong v Reid [1994] 1 AC 324, a bribe received in breach of fiduciary duty and its traceable proceeds are held on constructive trust for the injured principal. The court would have preferred that Privy Council decision to Lister & Co v Stubbs (1890) 45 Ch D 1. The recent Privy Council decision concerned English common-law principles, followed full argument, and was delivered principally by serving Law Lords.

6. There were also two independent bases for distinguishing Lister. First, the commissions derived directly from the claimants’ property because the prices were actually increased to fund them. Secondly, the fifth defendant participated in a fraudulent representation that the inflated invoice price was the true price. Halifax Building Society v Thomas [1996] Ch 217 did not prevent proprietary relief because this defendant was a fiduciary, and the claimants had neither affirmed the contracts nor left relevant unperformed contracts unrescinded.

This was a first-instance claim. Before its commencement, an adjudicator had awarded the first defendant an interim payment under a construction contract, and the Technology and Construction Court had entered summary judgment on that award. The present proceedings followed discovery of the secret commissions. Claims against the first to fourth defendants were settled during the trial; default judgments had already been entered against the sixth and seventh defendants.