Chancery Client Partners Ltd & Ors v MRC 957 Ltd & Ors

Bribery by an agent entitles the principal to rescind the contract with the briber, but does not generally permit rescission of separate contracts made with innocent third parties to implement the transaction. In that situation, the principal’s remedy lies in damages or an account against the agent and briber, subject to the usual requirements.

The same third-party limitation applies to rescission for undue influence or misrepresentation. Common mistake requires a shared assumption by the parties to the contract being challenged, and the assumed state of affairs must render performance impossible. A merely adverse or reduced fiscal benefit is insufficient.

The claimants purchased employee benefit trust and share-based tax schemes after advice from the first defendant, a company controlled by Mr Mark Coyle. The first defendant received undisclosed commissions from scheme providers. The claimants sought rescission of the arrangements implementing the schemes, or setting aside for common mistake, with the aim of resisting HMRC assessments.

The bribery issue had previously been determined in the claimants’ favour. At trial, the court proceeded on the assumed facts that the schemes were technically effective. The issues were whether bribery or undue influence affecting the advisory relationship entitled the claimants to rescind the implementation arrangements, and whether common mistake applied to the Blackstar scheme agreements.

1. Rescission for bribery. The established rule is that where one principal pays a bribe to the agent of another principal, the fraud entitles the injured principal to an account of the bribe or damages, and to rescind the contract with the briber. The rule does not extend to separate contracts with innocent third parties which implement the transaction. The claimants could therefore not rescind the Blackstar or employee benefit trust arrangements merely because the advisory company had received secret commissions.
2. Third-party contracts. Applying the principle stated in Pulsford v Richards (1853) 17 Beav. 87, a contract induced by fraud or bribery from outside the contract cannot generally be avoided against an innocent contracting party. The remedy is damages against the wrongdoer, or an account where available. On the assumed facts, the claimants had suffered no recoverable loss because the schemes were technically effective and they had pursued damages rather than an account.
3. Undue influence. The relationship of trust and confidence and the secret commissions could support claims in damages for breach of contract, negligence, breach of fiduciary duty or deceit. They did not entitle the claimants to rescind contracts and arrangements made with parties who were not responsible for, and had no relevant knowledge of, the undue influence. Royal Bank of Scotland Plc v Etridge [2001] UKHL 44 was confined to the principle that a third-party contracting party must have knowledge in the relevant circumstances; the special approach in suretyship cases did not apply.
4. Common mistake. Applying the test in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407, the common assumption must be shared by the parties to the agreement challenged, and the non-existence of the assumed state of affairs must make performance impossible. Assumptions about corporation tax savings or the recipients’ employment status affected fiscal benefit, not contractual performance. The doctrine therefore did not apply.
5. The rescission claims were dismissed by the agreed order.