Pengelly v Business Mortgage Finance 4 Plc

A mortgage broker may be an agent, and agency is not confined to authority to conclude a contract. Whether the relationship is fiduciary depends on the functions undertaken and the circumstances. Contractual terms may attenuate fiduciary duties without eliminating the fiduciary relationship.

Accessory liability for a secret commission requires a fiduciary breach, knowledge by the payer of the facts giving rise to the fiduciary relationship, and failure to disclose the payment to the principal. Disclosure of the possibility of commission does not suffice where the agreed terms require disclosure of its exact amount. A wholly undisclosed commission remains secret and may justify rescission, subject to counter-restitution.

Business Mortgage Finance 4 plc sought possession of a mortgaged property under a mortgage originally granted by Commercial First Business Ltd. The borrower, Richard Miles Pengelly, defended the claim and counterclaimed for rescission, alleging that his mortgage broker, UK Mortgages and Finance Services Ltd, had received an undisclosed commission from the lender. He also relied on an unfair relationship under section 140 A of the Consumer Credit Act 1974.

The County Court dismissed the defence and counterclaim. On appeal, the principal issues were whether the broker was a fiduciary, whether the lender was accessorily liable for a secret commission, whether the commission was “half-secret”, and whether the relationship was unfair.

1. Appeal on secret commission allowed. The broker was acting as Mr Pengelly’s agent. Agency is not confined to cases where the agent can conclude a contract. An agent may affect the principal’s legal relations in other ways, including by negotiating, making representations and advising on the appropriate transaction.
2. Agency and fiduciary status are distinct questions. The broker’s contractual terms stated that it acted on Mr Pengelly’s behalf, gave it authority to negotiate, and required it to identify a suitable mortgage. Those functions created a fiduciary relationship. The terms disclosed that commission might be received and thereby attenuated the duty of undivided loyalty, but did not eliminate the fiduciary relationship.
3. The broker breached its fiduciary duties by failing to disclose the commission. The contractual terms required disclosure of the exact amount where the fee was £250 or more. No disclosure was made.
4. Finance 4, treated as standing in the lender’s position, was accessorily liable. The applicable test required payment to the fiduciary, knowledge by the payer of the facts constituting the fiduciary relationship, and failure to disclose the payment to the principal. The lender knew the relevant facts. It took the hazardous course of relying on the broker to disclose the payment, but only actual disclosure would suffice.
5. This was a true secret commission, not a “half-secret” commission. The general reference to possible commission did not disclose that commission was in fact paid or its amount. Rescission was therefore available, subject to satisfactory counter-restitution. The parties were directed to agree proposals, failing which the matter would be restored for determination.
6. The appeal under section 140 A of the Consumer Credit Act 1974 was dismissed. The judge’s essentially factual conclusion that the relationship was not unfair was unimpeachable.

• High Court (Chancery Division): The appeal from the County Court was allowed in relation to accessory liability for the secret commission, subject to counter-restitution, and dismissed in relation to section 140 A of the Consumer Credit Act 1974.
• County Court at Truro: His Honour Judge Carr dismissed the defence and counterclaim and ordered removal of the stay on the possession order in an order dated 13 December 2019.